Chapter 13, Problem 13.6AP

1)

To determine

Compute the Component percentage for the year 2.

Explanation of Solution

Component percentage analysis: Component percentage analysis is prepared to analyse the relationship among various items of the financial statements with a particular base amount. This analysis is also called as common-size statement.

Compute the component percentage for the Year 2.

Corporation S
Income Statement
For the year ended Year 2
Particulars	Year 2
	Amount	Percent
Sales revenues	$ 453,000	100 %
Less: Cost of goods sold	($ 250,000)	-55.19%
Gross profit	$ 203,000	44.81%
Less: Operating expenses (Including interest on bonds)	($ 167,000)	-36.87%
Pre-tax income	$ 36,000	7.95%
Less: Income tax expense	($ 10,800)	-2.38%
Net income	$ 25,200	5.56%

Table (1)

Corporation S
Balance Sheet
As on Year 2
Particulars	Year 2
	Amount	Percent
Cash	$ 6,800	3.33%
Accounts receivable (net)	$ 42,000	20.59%
Merchandise Inventory	$ 25,000	12.25%
Prepaid expenses	$ 200	0.10%
Property and equipment (net)	$ 130,000	63.73%
Total assets	$ 204,000	100.00%
Accounts payable	$ 17,000	8.33%
Income taxes payable	$ 1,000	0.49%
Bonds payable (Interest rate: 10%)	$ 70,000	34.31%
Common stock($10 par value)	$ 100,000	49.02%
Retained earnings	$ 16,000	7.84%
Total liabilities and  equity	$ 204,000	100.00%

Table (2)

In the income statement, base amount is sales revenue. In the balance sheet, base amount is total assets.

2)

To determine

Compute the ratios in the DuPont model for Year 2.

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 which indicates the company performance. DuPont model equiation is as follows:

$\begin{array}{l}\text{ROE}\text{=}\text{Net profit margin}\text{×}\text{Total assets turnover}\text{×}\text{Financial leverage}\\ \frac{\text{Net Income}}{\text{Average}\text{TotalStockholders'}\text{equity}}\text{=}\{\begin{array}{l}\frac{\text{Net}\text{Income}}{\text{Net}\text{Sales}\text{Revenue}}\text{×}\frac{\text{Net}\text{Sales}\text{Revenue}}{\text{Average}\text{Total}\text{Assets}}\\ \text{×}\frac{\text{Average}\text{Total}\text{Assets}}{\text{Average}\text{TotalStockholders'}\text{equity}}\end{array}\end{array}$

Calculate the ratios in the DuPont model for Year 2.

	Ratio	Formula	Calculation	Result
1	Return on Equity (ROE)	$\frac{\text{Net}\text{Income}}{\text{Average}\text{Total}\text{Stockholder'}\text{Equity}}$	$\frac{\$25,200}{\$109,000\left(1\right)}$	23.11%
2	Return on Assets (ROA)	$\frac{\text{Net}\text{Income}}{\text{Average}\text{Total}\text{Assets}}$	$\frac{\$25,200}{\$187,500(2)}$	13.44%
3	Total asset turnover	$\frac{\text{Net}\text{Sales}\text{Revenue}}{\text{Average}\text{Total}\text{Assets}}$	$\frac{\$453,000}{\$187,500(2)}$	2.416
4	Net profit margin	$\frac{\text{Net}\text{Income}}{\text{Net Sales Revenue}}$	$\frac{\$25,200}{\$453,000}$	5.56%
5	Financial leverage	$\frac{\text{Average Total Assets}}{\text{Average}\text{Total}\text{Stockholder'}\text{Equity}}$	$\frac{\$187,500(2)}{\$109,000(1)}$	2.60

Table (3)

Working notes:

Calculate the average total stockholders’ equity

Average common stock for the year 2

$\begin{array}{c}\text{Average stockholders' equity}\text{=}\frac{\left(\begin{array}{l}\text{Beginning}\text{Stockholders'}\\ \text{ equity}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Ending}\text{Stockholders' }\\ \text{equity}\end{array}\right)}{\text{2}}\\ =\frac{\left(\$100,000+\$2,000\right)+\left(\$100,000+\$16,000\right)}{2}\\ =\frac{\$218,000}{2}\\ =\$109,000\end{array}$ (1)

Average total assets for the Year 2:

$\begin{array}{c}\text{Average Total Assets}\text{=}\frac{\text{Beginning total assets}\text{+}\text{Ending total assets}}{2}\\ \text{=}\frac{\text{\$204,000}\text{+}\text{\$171,000}}{2}\\ \text{=}\frac{\text{\$375,000}}{2}\\ =\$187,500\end{array}$ (2)