Chapter C, Problem 2AA

1.

To determine

Introduction:

Return on total assets:Thereturn on total assets is a ratio that determines the proportion in which the net income is earned by the corporation for each dollar of total assets employed.

The return on total assets of Company A and Company G for two years.

Answer to Problem 2AA

Thereturn on total assets for Company A is 12.88% and 14.20% in tow recent years and for Company G is 6.42% and 11.63% for two recent years.

Explanation of Solution

The Return on total assets is computed by dividing the net income of the year by the total assets of the year, as under:

  $\begin{array}{c}\text{Return on total assets of Company A-2017= }\frac{\text{Net Income}}{\text{Average Total Assets}}\\ =\frac{\$48,351}{\$375,319}\times 100\\ =12.88\%\end{array}$

  $\begin{array}{c}\text{Return on total assets of Company A -2016= }\frac{\text{Net Income}}{\text{Average Total Assets}}\\ =\frac{\$45,687}{\$321,686}\times 100\\ =14.20\%\end{array}$

  $\begin{array}{c}\text{Return on total assets of Company G-2017= }\frac{\text{Net Income}}{\text{Average Total Assets}}\\ =\frac{\$12,662}{\$197,295}\times 100\\ =6.42\%\end{array}$

  $\begin{array}{c}\text{Return on total assets of Company G-2016= }\frac{\text{Net Income}}{\text{Average Total Assets}}\\ =\frac{\$19,478}{\$167,497}\times 100\\ =11.63\%\end{array}$

2.

To determine

Introduction:

Return on total assets: The return on total assets is a ratio that determines the proportion in which the net income is earned by the corporation for each dollar of total assets employed.

The corporation providing better return in current year.

Answer to Problem 2AA

Company A provides the better return in the current year.

Explanation of Solution

Thereturn on total assets in the current year for Company A is 12.88% and for Company Gis 6.42%.Thus, Company A is better corporation as it has higher return on total assets as compared to Company G.

3.

To determine

Introduction:

Return on total assets: The return on total assets is a ratio that determines the proportion in which the net income is earned by the corporation for each dollar of total assets employed.

The profit margin and asset turnover of current year for both the corporation.

Answer to Problem 2AA

The profit margin for Company A is 21.09% and for Company G is 11.42%. The asset turnover for Company A is 0.61 and for Company G is 0.56.

Explanation of Solution

The profit margin for both the corporation is computed by dividing the net income by sales revenue, as under:

  $\begin{array}{c}\text{Profit Margin of Company A= }\frac{\text{Net Income}}{\text{Sales revenue}}\\ =\frac{\$48,351}{\$229,234}\times 100\\ =21.09\%\end{array}$

  $\begin{array}{c}\text{Profit Margin of Company G = }\frac{\text{Net Income}}{\text{Sales revenue}}\\ =\frac{\$12,662}{\$110,855}\times 100\\ =11.42\%\end{array}$

The assets turnover ratio is computed by dividing the sales revenue by total assets, as under:

  $\begin{array}{c}\text{Asset turnover of Company A= }\frac{\text{Sales revenue}}{\text{Total assets}}\\ =\frac{\$229,234}{\$375,319}\\ =0.61\end{array}$

  $\begin{array}{c}\text{Asset turnover of Company G = }\frac{\text{Sales revenue}}{\text{Total assets}}\\ =\frac{\$110,855}{\$197,295}\\ =0.56\end{array}$