Calculating the Average Total Assets and the Return on Assets The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows. Also, assume a tax rate of 31%. Somerville Company Income Statement For the Year Ended December 31, 20X2 Amount Percent Net sales $8,281,989 100.0% Less: Cost of goods sold (5,383,293) 65.0 Gross margin $2,898,696 35.0 Less: Operating expenses (1,323,368) 16.0 Operating income $1,575,328 19.0 Less: Interest expense (50,000) 0.6 Income before taxes $1,525,328 18.4 Less: Income taxes (31%)* (472,852) 5.7 Net income $1,052,476 12.7 * Includes both state and federal taxes. Somerville Company Statement of Retained Earnings For the Year Ended December 31, 20X2 Balance, beginning of period $1,979,155 Net income $1,052,476 Total $3,031,631 Preferred dividends (80,000) Dividends to common stockholders (201,887) Balance, end of period $2,749,744 Somerville Company Comparative Balance Sheets At December 31, 20X1 and 20X2 20X1 20X2 Assets Current assets: Cash $2,875,000 $2,580,000 Marketable securities 800,000 700,000 Accounts receivable (net) 939,776 690,000 Inventories 490,000 260,000 Other 93,000 74,261 Total current assets $5,197,776 $4,304,261 Property and equipment: Land $1,575,000 $1,067,315 Building and equipment (net) 1,348,800 1,150,000 Total long-term assets $2,923,800 $2,217,315 Total assets $8,121,576 $6,521,576 Liabilities and stockholders' equity Current liabilities: Notes payable, short term $1,170,127 $ 543,641 Accounts payable 161,205 101,500 Current maturity of long-term debt 3,000 2,000 Accrued payables 200,000 57,780 Total current liabilities $1,534,332 $ 704,921 Long-term liabilities: Bonds payable, 10% 500,000 500,000 Total liabilities $2,034,332 $1,204,921 Stockholders' equity: Preferred stock, $25 par, 8% $1,000,000 $1,000,000 Common stock, $1.50 par 337,500 337,500 Additional paid-in capital* 2,000,000 2,000,000 Retained earnings 2,749,744 1,979,155 Total stockholders' equity $6,087,244 $5,316,655 Total liabilities and stockholders' equity $8,121,576 $6,521,576 * For common stock only. Required: Note: Round the return on total assets to two decimal places. 1. Calculate the average total assets. $fill in the blank 1 2. Calculate the return on total assets. fill in the blank 2 %
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Calculating the Average Total Assets and the Return on Assets
The income statement, statement of
| Somerville Company Income Statement For the Year Ended December 31, 20X2 |
|||
| Amount | Percent | ||
| Net sales | $8,281,989 | 100.0% | |
| Less: Cost of goods sold | (5,383,293) | 65.0 | |
| Gross margin | $2,898,696 | 35.0 | |
| Less: Operating expenses | (1,323,368) | 16.0 | |
| Operating income | $1,575,328 | 19.0 | |
| Less: Interest expense | (50,000) | 0.6 | |
| Income before taxes | $1,525,328 | 18.4 | |
| Less: Income taxes (31%)* | (472,852) | 5.7 | |
| Net income | $1,052,476 | 12.7 | |
| * Includes both state and federal taxes. |
| Somerville Company Statement of Retained Earnings For the Year Ended December 31, 20X2 |
|
| Balance, beginning of period | $1,979,155 |
| Net income | $1,052,476 |
| Total | $3,031,631 |
| Preferred dividends | (80,000) |
| Dividends to common stockholders | (201,887) |
| Balance, end of period | $2,749,744 |
| Somerville Company Comparative Balance Sheets At December 31, 20X1 and 20X2 |
|||
| 20X1 | 20X2 | ||
| Assets | |||
| Current assets: | |||
| Cash | $2,875,000 | $2,580,000 | |
| Marketable securities | 800,000 | 700,000 | |
| 939,776 | 690,000 | ||
| Inventories | 490,000 | 260,000 | |
| Other | 93,000 | 74,261 | |
| Total current assets | $5,197,776 | $4,304,261 | |
| Property and equipment: | |||
| Land | $1,575,000 | $1,067,315 | |
| Building and equipment (net) | 1,348,800 | 1,150,000 | |
| Total long-term assets | $2,923,800 | $2,217,315 | |
| Total assets | $8,121,576 | $6,521,576 | |
| Liabilities and |
|||
| Current liabilities: | |||
| Notes payable, short term | $1,170,127 | $ 543,641 | |
| Accounts payable | 161,205 | 101,500 | |
| Current maturity of long-term debt | 3,000 | 2,000 | |
| Accrued payables | 200,000 | 57,780 | |
| Total current liabilities | $1,534,332 | $ 704,921 | |
| Long-term liabilities: | |||
| Bonds payable, 10% | 500,000 | 500,000 | |
| Total liabilities | $2,034,332 | $1,204,921 | |
| Stockholders' equity: | |||
| $1,000,000 | $1,000,000 | ||
| Common stock, $1.50 par | 337,500 | 337,500 | |
| Additional paid-in capital* | 2,000,000 | 2,000,000 | |
| Retained earnings | 2,749,744 | 1,979,155 | |
| Total stockholders' equity | $6,087,244 | $5,316,655 | |
| Total liabilities and stockholders' equity | $8,121,576 | $6,521,576 | |
| * For common stock only. |
Required:
Note: Round the return on total assets to two decimal places.
1. Calculate the average total assets.
$fill in the blank 1
2. Calculate the return on total assets.
fill in the blank 2 %
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