Chapter 1, Problem 2AA

1.

To determine

Introduction: The amount of total assets is always equal to the total liabilities and shareholder’s equity of the company. Total assets include current and non-current assets while total liabilities include current liabilities and non-current liabilities.

The total amount of assets of (a) Company A and (b) Company G for the current year.

Answer to Problem 2AA

1. Total amount of assets of current year of Company A is $375,319.
2. Total amount of assets of current year of Company G is $197,295.

Explanation of Solution

Total assets arethe same as the total liabilities of the company.

Here, total liabilities arethe sum of shareholder’s equity and total liabilities which is $375,319for Company A and $197,295 for Company G.

Therefore, amount of total assets is:

(a) $375,319 and (b) $197,295

2.

To determine

Introduction: Return on asset shows the efficiency of the managers to utilize the assets of the company to have good returns on it. It helps to understand the company’s position in the market.

The return on assets for the current year of (a) Company A and (b) Company G.

Answer to Problem 2AA

1. The return on assets for the current year is 13.87% for Company A.
2. The return on asset for the current year is 6.94% for Company G.

Explanation of Solution

Total assets arethe same as total liabilities.

1. So, total assets for the current year are $375,319 and for the previous year is $321,686for Company A.

  $\begin{array}{l}\text{Average total assets=}\frac{\text{Beginning assets+ending assets}}{2}\\ \text{ =}\frac{\$321,686+\$375,319}{2}\\ \text{ =\$348,502}\text{.50}\end{array}$

Return on assets:

  $\begin{array}{c}\text{Return on assets=}\frac{\text{Net Income}}{\text{Average total Assets}}\times 100\\ \text{ =}\frac{\text{\$48,351}}{\$348,502.50}\times 100\\ \text{ =13}\text{.87\%}\\ \end{array}$

2. Total assets for the current year are $197,295 and for the previous year is $167,497 for Company G.

  $\begin{array}{l}\text{Average total assets=}\frac{\text{Beginning assets+ending assets}}{2}\\ \text{ =}\frac{\$197,295+\$167,497}{2}\\ \text{ =\$182,396}\end{array}$

Return on assets:

  $\begin{array}{l}\text{Return on assets=}\frac{\text{Net Income}}{\text{Average total Assets}}\times 100\\ \text{ =}\frac{\text{\$12,662}}{\$182,396}\times 100\\ \text{ =6}\text{.94\%}\\ \end{array}$

3.

To determine

Introduction:Total expenses of the company includes the expenditures which are must for operations of the company to generate income. Thus, income and expenses are related to each other. Net income is calculated by subtracting the expenses from the revenues of the company.

The total expenses of the (a) Company A and (b) Company G for the current year.

Answer to Problem 2AA

1. The total expense for the current year is $180,883.
2. The total expense for the current year is $98,193.

Explanation of Solution

Net income is generated by subtracting the expenses of the company from its revenue.

1. So, to calculate the total expenses, net income should be subtracted from the revenues of company A.

  $\begin{array}{l}\text{Total expenses= Revenues-Net income}\\ \text{ =\$229,234-\$48,351}\\ \text{ =\$180,883 }\end{array}$

2. So, to calculate the total expenses, net income should be subtracted from the revenues of company G.

  $\begin{array}{l}\text{Total expenses= Revenues-Net income}\\ \text{ =\$110,855-\$12,662}\\ \text{ =\$98,193 }\end{array}$

4.

To determine

Introduction: Return on asset shows the efficiency of the managers to utilize the assets of the company to have good returns on it. It helps to understand the company’s position in the market.

To compare: The return on asset of company A and Company G with the market average return which is 10%.

Explanation of Solution

The market average return on asset is 10%.

1. Return on asset of company A is 13.87%.

Thus, Company A’s return on asset is better than the market’s return on asset. Therefore, it can be said that company A is performing very good in its industry and is expected to have good returns on its investment too.

2. Return on asset of company G is 6.94%.

Thus, Company G’s return on asset is worse than the market’s return on asset. Therefore, it can be said that company G is not performing well in its industry and is expected to have lower returns on its investment too.

5.

To determine

Introduction: Return on asset shows the efficiency of the managers to utilize the assets of the company to have good returns on it. It helps to understand the company’s position in the market.

The company with good returns for investment.

Explanation of Solution

Returns on investment depend upon the return on assets ratios of the company. Return on assets shows the capacity of the company to convert its assets into income. A high ratio indicates the good efficiency of the company. Higher the ratio,the higher the returns.

Return on assets of Company A is 13.87% while Company G is 6.94%. Thus, one would invest in Company A as this company has a capacity to give higher returns on the investment.