Concept Introduction:
Return on equity is a financial ratio which measures financial performance of the company. It is calculated by net income of the company by shareholders equity.
Acid test ratio of a company is commonly known as quick ratio. In calculating acid test ratio, numerator generally includes cash and cash equivalents, accounts receivable but excludes inventory and denominator is total of current liabilities.
Requirement 1:
We have to determine the return on investment.
Answer to Problem 3.18P
The return on investment for year 2014 is 11.3%.
Explanation of Solution
Return on investment for year 2017
| Particulars | Amount($) |
| Net income(a) | 102000 |
| Total assets (b) | 898000 |
| Return on investment (a/b*100) | 11.3% |
Concept Introduction:
Return on investment is a financial ratio which measures the benefit obtained from an investment. It is calculated by dividing net income by total assets.
Return on equity is a financial ratio which measures financial performance of the company. It is calculated by net income of the company by shareholders equity.
Current ratio is a ratio of company between current assets and current liabilities of a company. It is calculated by dividing current assets by current Liabilities and ideal current ratio of a company should be 2:1.
Working capital means difference between current assets and current liabilities.
Acid test ratio of a company is commonly known as quick ratio. In calculating acid test ratio, numerator generally includes cash and cash equivalents, accounts receivable but excludes inventory and denominator is total of current liabilities.
Requirement 2:
We have to determine the return on equity.
Answer to Problem 3.18P
The return on equity for year 2014 is 18.4%.
Explanation of Solution
Return on equity for year 2017
| Particulars | Amount($) |
| Net income(a) | 102000 |
| Shareholder equity (b) | 552,000 |
| Return on equity (a/b*100) | 18.4% |
Concept Introduction:
Return on investment is a financial ratio which measures the benefit obtained from an investment. It is calculated by dividing net income by total assets.
Return on equity is a financial ratio which measures financial performance of the company. It is calculated by net income of the company by shareholders equity.
Current ratio is a ratio of company between current assets and current liabilities of a company. It is calculated by dividing current assets by current Liabilities and ideal current ratio of a company should be 2:1.
Working capital means difference between current assets and current liabilities.
Acid test ratio of a company is commonly known as quick ratio. In calculating acid test ratio, numerator generally includes cash and cash equivalents, accounts receivable but excludes inventory and denominator is total of current liabilities.
Requirement 3:
We have to determine the working capital for the year.
Answer to Problem 3.18P
The working capital at December 2017 is $319000
Explanation of Solution
- a) Working capital at December 2017
At December 2017
| Particulars | Amount($) |
| Current assets (a) | 609,000 |
| Current Liabilities (b) | 290,000 |
| Working Capital (a-b) | 319,000 |
Concept Introduction:
Return on investment is a financial ratio which measures the benefit obtained from an investment. It is calculated by dividing net income by total assets.
Return on equity is a financial ratio which measures financial performance of the company. It is calculated by net income of the company by shareholders equity.
Current ratio is a ratio of company between current assets and current liabilities of a company. It is calculated by dividing current assets by current Liabilities and ideal current ratio of a company should be 2:1.
Working capital means difference between current assets and current liabilities.
Acid test ratio of a company is commonly known as quick ratio. In calculating acid test ratio, numerator generally includes cash and cash equivalents, accounts receivable but excludes inventory and denominator is total of current liabilities.
Requirement 4
We have to determine the current ratio.
Answer to Problem 3.18P
The current ratio at December 2017 is 2.1
Explanation of Solution
- b) Current ratio at December 2017
At December 2017
| Particulars | Amount($) |
| Current assets (a) | 609000 |
| Current Liabilities (b) | 290,000 |
| Current ratio(a/b) | 2.1 |
Concept Introduction:
Return on investment is a financial ratio which measures the benefit obtained from an investment. It is calculated by dividing net income by total assets.
Return on equity is a financial ratio which measures financial performance of the company. It is calculated by net income of the company by shareholders equity.
Current ratio is a ratio of company between current assets and current liabilities of a company. It is calculated by dividing current assets by current Liabilities and ideal current ratio of a company should be 2:1.
Working capital means difference between current assets and current liabilities.
Acid test ratio of a company is commonly known as quick ratio. In calculating acid test ratio, numerator generally includes cash and cash equivalents, accounts receivable but excludes inventory and denominator is total of current liabilities.
Requirement 5
We have to determine the acid test ratio.
Answer to Problem 3.18P
The acid test ratio at December 2017 is 1.2.
Explanation of Solution
Acid test ratio at December 2017
At December 2017
| Particulars | Amount($) |
| Current assets | 609,000 |
| Less: Inventories | 261,000 |
| Quick assets (a) | 348,000 |
| Current Liabilities (b) | 290,000 |
| Acid test ratio(a/b) | 1.2 |
Concept Introduction:
Return on investment is a financial ratio which measures the benefit obtained from an investment. It is calculated by dividing net income by total assets.
Return on equity is a financial ratio which measures financial performance of the company. It is calculated by net income of the company by shareholders equity.
Current ratio is a ratio of company between current assets and current liabilities of a company. It is calculated by dividing current assets by current Liabilities and ideal current ratio of a company should be 2:1.
Working capital means difference between current assets and current liabilities.
Acid test ratio of a company is commonly known as quick ratio. In calculating acid test ratio, numerator generally includes cash and cash equivalents, accounts receivable but excludes inventory and denominator is total of current liabilities.
Requirement 6
We have to determine the effect of payment of accounts payable.
Answer to Problem 3.18P
Payment of accounts payable will have no effect on return on investment and return on equity but it will have effect on calculation of working capital and current ratio
Explanation of Solution
Payment of accounts payable will have no effect on return on investment and return on equity but it will have effect on calculation of working capital and current ratio.
Working capital at December 2017
At December 2017
| Particulars | Amount($) |
| Current assets (a) | 609,000 |
| Current Liabilities (b)(290000-50000) | 240,000 |
| Working Capital (a-b) | 369,000 |
Current ratio at December 2017
At December 2017
| Particulars | Amount($) |
| Current assets (a) | 609000 |
| Current Liabilities (b) | 240,000 |
| Current ratio(a/b) | 2.53 |
Concept Introduction:
Return on investment is a financial ratio which measures the benefit obtained from an investment. It is calculated by dividing net income by total assets.
Return on equity is a financial ratio which measures financial performance of the company. It is calculated by net income of the company by shareholders equity.
Current ratio is a ratio of company between current assets and current liabilities of a company. It is calculated by dividing current assets by current Liabilities and ideal current ratio of a company should be 2:1.
Working capital means difference between current assets and current liabilities.
Acid test ratio of a company is commonly known as quick ratio. In calculating acid test ratio, numerator generally includes cash and cash equivalents, accounts receivable but excludes inventory and denominator is total of current liabilities.
Requirement 7
To determine:
We have to determine the effect of collection of accounts receivable.
Collection of accounts receivable will have no effect on Return on equity but it will effect return on investment, Current ratio and working capital.
Collection of accounts receivable will have no effect on Return on equity but it will effect return on investment, Current ratio and working capital.
Return on investment for year 2017
| Particulars | Amount($) |
| Net income(a) | 102000 |
| Total assets (b)(898000+ 50,000) | 948,000 |
| Return on investment (a/b*100) | 10.75% |
Working capital at December 2017
At December 2017
| Particulars | Amount($) |
| Current assets (a)(609000+ 50000) | 659,000 |
| Current Liabilities (b) | 290,000 |
| Working Capital (a-b) | 369,000 |
Current ratio at December 2017
At December 2017
| Particulars | Amount($) |
| Current assets (a) | 659000 |
| Current Liabilities (b) | 290,000 |
| Current ratio(a/b) | 2.27 |
Concept Introduction:
Return on investment is a financial ratio which measures the benefit obtained from an investment. It is calculated by dividing net income by total assets.
Return on equity is a financial ratio which measures financial performance of the company. It is calculated by net income of the company by shareholders equity.
Current ratio is a ratio of company between current assets and current liabilities of a company. It is calculated by dividing current assets by current Liabilities and ideal current ratio of a company should be 2:1.
Working capital means difference between current assets and current liabilities.
Acid test ratio of a company is commonly known as quick ratio. In calculating acid test ratio, numerator generally includes cash and cash equivalents, accounts receivable but excludes inventory and denominator is total of current liabilities.
Requirement 7
We have to determine the effect of collection of accounts receivable.
Answer to Problem 3.18P
Collection of accounts receivable will have no effect on Return on equity but it will effect return on investment, Current ratio and working capital.
Explanation of Solution
Collection of accounts receivable will have no effect on Return on equity but it will effect return on investment, Current ratio and working capital.
Return on investment for year 2017
| Particulars | Amount($) |
| Net income(a) | 102000 |
| Total assets (b)(898000+ 50,000) | 948,000 |
| Return on investment (a/b*100) | 10.75% |
Working capital at December 2017
At December 2017
| Particulars | Amount($) |
| Current assets (a)(609000+ 50000) | 659,000 |
| Current Liabilities (b) | 290,000 |
| Working Capital (a-b) | 369,000 |
Current ratio at December 2017
At December 2017
| Particulars | Amount($) |
| Current assets (a) | 659000 |
| Current Liabilities (b) | 290,000 |
| Current ratio(a/b) | 2.27 |
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Accounting: What the Numbers Mean
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