
1.
To calculate: The AE company’s return on assets, profit margin and asset turnover for Pizza.
1.

Explanation of Solution
Rate of return on the total assets is the ratio of the net income, and interest expense to the average total assets. The rate of return on total assets measures the efficiency of the business. It measures how efficiently the business is using its total assets in generating the income.
The rate of return on the total assets is calculated as follows:
- Determine the return on assets ratio:
The return on assets ratio is determined as follows:
Determine the average total assets:
Hence, the return on asset ratio is 4.73%.
- Determine the profit margin ratio:
The profit margin ratio is determined as follows:
Hence, the profit margin ratio is 2.4%.
Determine the asset turnover ratio:
The asset turnover ratio is determined as follows:
Hence, the asset turnover ratio is 1.9 times.
2.
To calculate: The B company’s return on assets, profit margin and asset turnover for Pizza Prince.
2.

Explanation of Solution
- Determine the return on assets ratio:
The return on assets ratio is determined as follows:
Determine the average total assets:
Hence, the return on asset ratio is 29.85%.
- Determine the profit margin ratio:
The profit margin ratio is determined as follows:
Hence, the profit margin ratio is 14%.
- Determine the asset turnover ratio:
Determine the asset turnover ratio is determined as follows:
Hence, the asset turnover ratio is 2.1 Times.
3.
To comment: On the ratios.
3.

Explanation of Solution
When comparing Company AE and Company B, the Company B’s ratios are higher than Company AE.
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Chapter 7 Solutions
Financial Accounting
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