
Inferring Information from the DuPont Model Ratios
LO13-5 in this chapter, we discussed the DuPont model. Using that framework, find the missing amount in each of the following cases:
Case 1: ROE is 10 percent; net income is $200,000; the total asset turnover ratio is 5; and net sales are $1,000,000. What is the amount of average stockholders’ equity?
Case 2: Net income is $1,500,000; net sales are $8,000,000; average stockholders’ equity is $12,000,000; ROE is 22 percent; and the total asset turnover ratio is 8. What is the amount of average total assets?
Case 3: ROE is 15 percent; the net profit margin is 10 percent; the total asset turnover ratio is 5; and average total assets are $1,000,000. What is the amount of average stockholders’ equity?
Case 4: Net income is $500,000; ROE is 15 percent; the total asset turnover ratio is 5; net sales are $1,000,000; and financial leverage is 2. What is the amount of average total assets?
1.

Compute the amount of average stockholders’ equity using the DuPont model.
Explanation of Solution
DuPont model: It is a model which allows the analyst to analyse a company’s performance using ratios. This model uses the ratios that indicate the company performance. DuPont model equation is as follows:
Return on equity ratio: Rate of return on equity ratio is used to determine the relationship between the net income available for the common stockholders’ and the average common equity that is invested in the company.
Determine the amount of average stockholders’ equity.
Hence, the amount of average stockholders’ equity is $200,000.
2.

Compute the amount of average total assets using the DuPont model.
Explanation of Solution
DuPont model: It is a model which allows the analyst to analyse a company’s performance using ratios. This model uses the ratios that indicate the company performance. DuPont model equation is as follows:
Total Asset turnover: Total asset turnover is a ratio that measures the productive capacity of the total assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total assets.
Determine the amount of average total assets.
Hence, the amount of average total assets is $1,000,000.
3.

Compute the amount of average stockholders’ equity.
Explanation of Solution
DuPont model: It is a model which allows the analyst to analyse a company’s performance using ratios. This model uses the ratios that indicate the company performance. DuPont model equation is as follows:
Total Asset turnover: Total asset turnover is a ratio that measures the productive capacity of the total assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total assets.
Return on equity ratio: Rate of return on equity ratio is used to determine the relationship between the net income available for the common stockholders’ and the average common equity that is invested in the company.
Determine the amount of average stockholders’ equity.
Working Note:
Determine the amount of average asset turnover.
Determine the amount of net income.
Hence, the amount of average stockholders’ equity is $3,333,333.
4.

Compute the amount of average total assets using the DuPont model.
Explanation of Solution
DuPont model: It is a model which allows the analyst to analyse a company’s performance using ratios. This model uses the ratios that indicate the company performance. DuPont model equation is as follows:
Total Asset turnover: Total asset turnover is a ratio that measures the productive capacity of the total assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total assets.
Determine the amount of average total assets.
Hence, the amount of average total assets is $200,000.
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Chapter 13 Solutions
FINANCIAL ACCOUNTING 9TH
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- Can you solve this general accounting problem using appropriate accounting principles?arrow_forwardWhich is not an objective of internal controls?A. Safeguard assetsB. Improve profitsC. Ensure accurate recordsD. Promote operational efficiency no aiarrow_forwardPlease provide the accurate answer to this financial accounting problem using appropriate methods.arrow_forward
- Please provide the correct answer to this financial accounting problem using valid calculations.arrow_forward20 Nelson and Murdock, a law firm, sells $8,000,000 of four-year, 8% bonds priced to yield 6.6%. The bonds are dated January 1, 2026, but due to some regulatory hurdles are not issued until March 1, 2026. Interest is payable on January 1 and July 1 each year. The bonds sell for $8,388,175 plus accrued interest. In mid-June, Nelson and Murdock earns an unusually large fee of $11,000,000 for one of its cases. They use part of the proceeds to buy back the bonds in the open market on July 1, 2026 after the interest payment has been made. Nelson and Murdock pays a total of $8,456,234 to reacquire the bonds and retires them. Required1. The issuance of the bonds—assume that Nelson and Murdock has adopted a policy of crediting interest expense for the accrued interest on the date of sale.2. Payment of interest and related amortization on July 1, 2026.3. Reacquisition and retirement of the bonds.arrow_forward13 Which of the following is correct about the difference between basic earnings per share (EPS) and diluted earnings per share? Question 13 options: Basic EPS uses comprehensive income in its calculation, whereas diluted EPS does not. Basic EPS is not a required disclosure, whereas diluted EPS is required disclosure. Basic EPS uses total common shares outstanding, whereas diluted EPS uses the weighted-average number of common shares. Basic EPS is not adjusted for the potential dilutive effects of complex financial structures, whereas diluted EPS is adjusted.arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
