Chapter 23, Problem 23.5APR

(1)

To determine

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

To prepare: The income statements for B and C Divisions of Company P for the year ended December 31, 2016.

To determine

(2)

Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.

Formula of profit margin:

$\text{Profit margin}=\frac{\text{Income from operations}}{\text{Sales}}$

Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.

Formula of investment turnover:

$\text{Investment turnover}=\frac{\text{Sales}}{\text{Invested assets}}$

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies.

Formula of ROI according to Dupont formula:

$\begin{array}{c}\text{Return on investment = Profit margin × Investment turnover}\\ \text{=}\frac{\text{Income from operations}}{\text{Sales}}\times \frac{\text{Sales}}{\text{Invested assets}}\\ \text{=}\frac{\text{Income from operations}}{\text{Invested assets}}\end{array}$

To determine: Profit margin, investment turnover, and return on investment of B and C Divisions

(3)

To determine

Residual income: The remaining income from operations after deducting the desired acceptable income is referred to as residual income.

Formula of residual income:

Income from operations	XXX
Less minimum acceptable income from operations as a percent of invested assets	XXX
Residual income	XXX

Table (2)

To determine: Residual income of for B and C Divisions

(4)

To determine

The profitable division by using the performance measures of income from operations, ROI, and residual income.