Chapter 9, Problem 9.3EYCT

(a) (1)

To determine

Annual Report: It is a comprehensive financial report that shows all the business activities that takes place throughout the previous financial year. Its purpose is to provide the complete financial information of a company’s financial activities to its users in order to help them analyze and take well informed decisions.

Financial Ratios: Financial ratios are the metrics used to evaluate the overall financial performance of a company during a specific period of time.

To compute: Return on assets

Explanation of Solution

Compute the return on assets ratio for Incorporation A, and Incorporation W for the year 2014.

Title: Compute the return on assets ratio
Ratios	Incorporation A	Incorporation W
$\begin{array}{l}\text{Return }\\ \text{on assets}\end{array}]=\frac{\text{Net income}}{\text{Average total assets}}\times 100$	$\begin{array}{l}=\frac{\text{\$241}}{\text{\$47,332}}\times 100\\ =0.5\%\end{array}$	$\begin{array}{l}=\frac{\text{\$16,363}}{\text{\$204,228}\text{.5}}\times 100\\ =8\%\end{array}$

Table (1)

Working notes:

Compute the average total assets for Incorporation A.

Beginning total assets =$54,505

Ending total assets =$40,159

$\begin{array}{c}\text{Average total assets = }\frac{\left[\begin{array}{l}\text{Beginning total }\\ \text{assets}\left(2013\right)\end{array}\right]+\left[\begin{array}{l}\text{Ending total}\\ \text{ assets}\left(2014\right)\end{array}\right]}{2}\\ =\frac{\$54,505+\$40,159}{2}\\ =\$47,332\end{array}$ (1)

Compute the average total assets for Incorporation W.

Beginning total assets =$204,751

Ending total assets =$203,706

$\begin{array}{c}\text{Average total assets = }\frac{\left[\begin{array}{l}\text{Beginning total }\\ \text{assets}\left(2013\right)\end{array}\right]+\left[\begin{array}{l}\text{Ending total}\\ \text{ assets}\left(2014\right)\end{array}\right]}{2}\\ =\frac{\$204,751+\$203,706}{2}\\ =\$204,228.5\end{array}$ (2)

For net income, refer Consolidated Statements of Operations for the year 2014 reported in Appendix D for Incorporation A and refer Consolidated Statements of Comprehensive Income: Consolidated net income attributable to Incorporation W for the year 2014 Appendix E for Company VF.

For average total assets, refer Consolidated Balance Sheets for the year 2014 reported in Appendix D for Incorporation A and Appendix E for Incorporation W. The total assets reported at the end of the year 2013, is the beginning total assets for the year 2014.

(a) (2)

To determine

To compute: Profit margin ratio

Explanation of Solution

Compute the profit margin ratio for Incorporation A and Incorporation W for the year 2014.

Title: Compute the profit margin ratio
Ratios	Incorporation A	Incorporation W
$\begin{array}{l}\text{Profit }\\ \text{margin}\end{array}]=\frac{\text{Net income}}{\text{Net sales}}\times 100$	$\begin{array}{l}=\frac{\text{\$241}}{\text{\$88,988}}\times 100\\ =0.3\%\end{array}$	$\begin{array}{l}=\frac{\text{\$16,363}}{\text{\$485,651}}\times 100\\ =3.4\%\end{array}$

Table (2)

Explanation:

For net income and net sales, refer Consolidated Statements of Operations for the year 2014 reported in Appendix D for Incorporation A, and refer Consolidated Statements of Income for the year 2014 Appendix E for Incorporation W.

(a) (3)

To determine

To compute: Assets turnover ratio

Explanation of Solution

Compute the assets turnover ratio for Incorporation A and Incorporation W for the year 2014.

Title: Compute the assets turnover ratio
Ratios	Incorporation A	Incorporation W
$\begin{array}{l}\text{Asset }\\ \text{turnover}\end{array}]=\frac{\text{Net sale}s}{\text{Average total assets}}\times 100$	$\begin{array}{l}=\frac{\text{\$88,988}}{\text{\$47,332}}\times 100\\ =\text{1}\text{.88 times}\end{array}$	$\begin{array}{l}=\frac{\text{\$485,651}}{\text{\$204,228}\text{.5}}\times 100\\ =2.38\text{ times}\end{array}$

Table (2)

For net sales, refer Consolidated Statements of Operations for the year 2014 reported in Appendix D for Incorporation A and refer Consolidated Statements of Income for the year 2014 Appendix E for Incorporation W.

For average total assets, refer Consolidated Balance Sheets for the year 2014 reported in Appendix D for Incorporation A and Appendix E for Incorporation W. The total assets reported at the end of the year 2013, is the beginning total assets for the year 2014.

(b)

To determine

To conclude: on the management of the plant assets from the findings.

Explanation of Solution

The assets turnover ratio indicates how efficiently a company utilizes its available assets to maximize its sales. The assets turnover ratio of Incorporation W is higher than Incorporation A. It indicates that Incorporation W has more effectively used its assets, to generate revenue.

Moreover, Incorporation W had been able to earn more profits out of its sales than Incorporation A that is, indicated in the significant difference of the profit margin ratio for both the companies. This resulted in higher return on assets for Incorporation W than Incorporation A.

Conclusion

There, it can be concluded that Incorporation W having more assets turnover, profit margin, and return on assets implies that, it has a more effective, and efficient asset management system than Incorporation A.