Managerial Accounting
Managerial Accounting
15th Edition
ISBN: 9781337912020
Author: Carl Warren, Ph.d. Cma William B. Tayler
Publisher: South-Western College Pub
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Chapter 16, Problem 5PB

1(a)

To determine

Determine return on total assets for five years (20Y4 to 20Y8).

1(a)

Expert Solution
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Explanation of Solution

Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.

Rate of return on assets(20Y8)=Netincome + Interest expenseAverage total assets=$6,623,780$25,988,665=25.5%

Rate of return on assets(20Y7)=Netincome + Interest expenseAverage total assets=$4,606,056$19,859,586=23.2%

Rate of return on assets(20Y6)=Netincome + Interest expenseAverage total assets=$3,540,600$14,854,406=23.8%

Rate of return on assets(20Y5)=Netincome + Interest expenseAverage total assets=$2,458,000$11,370,240=21.6%

Rate of return on assets(20Y4)=Netincome + Interest expenseAverage total assets=$1,900,000$8,676,000=21.9%

Return on assets determines the particular company’s overall earning power. It is determined by dividing sum of net income and interest expense and average total assets.

Formula:

Rate of return on assets=Netincome + Interest expenseAverage total assets

1(b)

To determine

Determine return on stockholders’ equity for five years.

1(b)

Expert Solution
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Explanation of Solution

 Rate of return on stockholders' equity(20Y8)}= Net income Average stockholder’s equity=$5,571,720$15,920,340=35.0%

Rate of return on stockholders' equity(20Y7)}= Net income Average stockholder’s equity=$3,714,480$11,277,240=32.9

Rate of return on stockholders' equity(20Y6)}= Net income Average stockholder’s equity=$2,772,000$8,034,000=34.5%

Rate of return on stockholders' equity(20Y5)}= Net income Average stockholder’s equity=$1,848,000$5,724,000=32.3%

Rate of return on stockholders' equity(20Y4)}= Net income Average stockholder’s equity=$1,400,000$4,100,000=34.1%

Rate of return on stockholders’ equity is used to determine the relationship between the net income and the average common equity that are invested in the company.

Formula: Rate of return on stockholders' equtiy = Net incomeAverage  stockholder’s equity

1(c)

To determine

Determine times interest earned ratio for five years.

1(c)

Expert Solution
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Explanation of Solution

Times-interest-earned ratio (20Y8) }=Net Income+Incometaxexpense+Interest expenseInterest expense=$7,849,352$1,052,060=7.5times

Times-interest-earned ratio (20Y7) }=Net Income+Incometaxexpense+Interest expenseInterest expense=$5,451,278$891,576=6.1times

Times-interest-earned ratio (20Y6) }=Net Income+Incometaxexpense+Interest expenseInterest expense=$4,180,920$768,600=5.4times

Times-interest-earned ratio (20Y5) }=Net Income+Incometaxexpense+Interest expenseInterest expense=$2,899,600$6,10,000=4.8times

Times-interest-earned ratio (20Y4) }=Net Income+Incometaxexpense+Interest expenseInterest expense=$2,220,000$500,000=4.4times

Times interest earned ratio quantifies the number of times the earnings before interest and taxes can pay the interest expense. First, determine the sum of income before income tax and interest expense. Then, divide the sum by interest expense.

Formula:

Times-interest-earned ratio }=Income before income tax+Interest expenseInterest expense

1(d)

To determine

Determine ratio of liabilities to stockholders’ equity for five years (20Y4 to 20Y8).

1(d)

Expert Solution
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Explanation of Solution

 Ratio of liabilities to stockholders' equity(20Y8)}=Total liabilitiesStockholders' equity=$10,672,291$18,706,200=0.6\

 Ratio of liabilities to stockholders' equity(20Y7)}=Total liabilitiesStockholders' equity=$9,464,359$13,134,480=0.7

 Ratio of liabilities to stockholders' equity(20Y6)}=Total liabilitiesStockholders' equity=$7,700,333$9,420,000=0.8

 Ratio of liabilities to stockholders' equity(20Y5)}=Total liabilitiesStockholders' equity=$5,940,480$6,648,000=0.9

 Ratio of liabilities to stockholders' equity(20Y4)}=Total liabilitiesStockholders' equity=$5,352,000$4,800,000=1.1

Ratio of liabilities to stockholders’ equity is determined by dividing liabilities and stockholders’ equity. Liabilities are determined as the difference between ending balance of assets and stockholders’ equity. 

Formula:

 Ratio of liabilities to stockholders' equity=Total liabilitiesStockholders' equity

To determine

Display the determined ratios in a graph.

Expert Solution
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Explanation of Solution

Return on total assets

Managerial Accounting, Chapter 16, Problem 5PB , additional homework tip  1

Figure (1)

Return on stockholders’ equity

Managerial Accounting, Chapter 16, Problem 5PB , additional homework tip  2

Figure (2)

Times interest earned ratio

Managerial Accounting, Chapter 16, Problem 5PB , additional homework tip  3

Figure (3)

Ratio of liabilities to stockholders’ equity

Managerial Accounting, Chapter 16, Problem 5PB , additional homework tip  4

Figure (4)

2.

To determine

Prepare analysis of graphs.

2.

Expert Solution
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Explanation of Solution

Analysis:

  • • The return on total assets and return on stockholders’ equity are in increasing trend for the last five years. There is a positive use of leverage. It is evident through the above ratios.
  • • The ratio of liabilities to stockholders’ equity shows that the proportion of debt to stockholders’ equity is declining over the period.
  • • The level of debt has been relative to the equity and has improved in the five years.
  • • The times interest earned ratio is improving
  • • g when compared to industry average.

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Chapter 16 Solutions

Managerial Accounting

Ch. 16 - Prob. 1BECh. 16 - Prob. 2BECh. 16 - The following items are reported on a companys...Ch. 16 - Prob. 4BECh. 16 - Prob. 5BECh. 16 - Prob. 6BECh. 16 - Prob. 7BECh. 16 - Prob. 8BECh. 16 - Prob. 9BECh. 16 - Prob. 10BECh. 16 - Prob. 11BECh. 16 - Prob. 1ECh. 16 - The following comparative income statement (in...Ch. 16 - Prob. 3ECh. 16 - Prob. 4ECh. 16 - Prob. 5ECh. 16 - The following data were taken from the balance...Ch. 16 - PepsiCo, Inc. (PEP), the parent company of...Ch. 16 - Current position analysis The bond indenture for...Ch. 16 - Prob. 9ECh. 16 - Accounts receivable analysis Xavier Stores Company...Ch. 16 - Prob. 11ECh. 16 - Prob. 12ECh. 16 - Ratio of liabilities to stockholders equity and...Ch. 16 - Hasbro, Inc. (HAS), and Mattel, Inc. (MAT), are...Ch. 16 - Recent balance sheet information for two companies...Ch. 16 - Prob. 16ECh. 16 - Prob. 17ECh. 16 - Prob. 18ECh. 16 - Prob. 19ECh. 16 - Prob. 20ECh. 16 - Prob. 21ECh. 16 - Prob. 22ECh. 16 - Prob. 23ECh. 16 - Prob. 24ECh. 16 - Prob. 25ECh. 16 - Comprehensive income Anson Industries, Inc.,...Ch. 16 - Prob. 1PACh. 16 - Prob. 2PACh. 16 - Prob. 3PACh. 16 - Measures of liquidity, solvency, and profitability...Ch. 16 - Prob. 5PACh. 16 - Prob. 1PBCh. 16 - Prob. 2PBCh. 16 - Prob. 3PBCh. 16 - Prob. 4PBCh. 16 - Prob. 5PBCh. 16 - Prob. 1MADCh. 16 - Prob. 2MADCh. 16 - Deere Company (DE) manufactures and distributes...Ch. 16 - Marriott International, Inc. (MAR), and Hyatt...Ch. 16 - Prob. 1TIFCh. 16 - Real-world annual report The financial statements...Ch. 16 - Prob. 3TIF
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