1(a)
Determine return on total assets for five years (20Y4 to 20Y8).
1(a)
Explanation of Solution
Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.
Return on assets determines the particular company’s overall earning power. It is determined by dividing sum of net income and interest expense and average total assets.
Formula:
1(b)
Determine return on
1(b)
Explanation of Solution
Formula:
1(c)
Determine times interest earned ratio for five years.
1(c)
Explanation of Solution
Times interest earned ratio quantifies the number of times the earnings before interest and taxes can pay the interest expense. First, determine the sum of income before income tax and interest expense. Then, divide the sum by interest expense.
Formula:
1(d)
Determine ratio of liabilities to stockholders’ equity for five years (20Y4 to 20Y8).
1(d)
Explanation of Solution
Ratio of liabilities to stockholders’ equity is determined by dividing liabilities and stockholders’ equity. Liabilities are determined as the difference between ending balance of assets and stockholders’ equity.
Formula:
Display the determined ratios in a graph.
Explanation of Solution
Return on total assets
Figure (1)
Return on stockholders’ equity
Figure (2)
Times interest earned ratio
Figure (3)
Ratio of liabilities to stockholders’ equity
Figure (4)
2.
Prepare analysis of graphs.
2.
Explanation of Solution
Analysis:
- • The return on total assets and return on stockholders’ equity are in increasing trend for the last five years. There is a positive use of leverage. It is evident through the above ratios.
- • The ratio of liabilities to stockholders’ equity shows that the proportion of debt to stockholders’ equity is declining over the period.
- • The level of debt has been relative to the equity and has improved in the five years.
- • The times interest earned ratio is improving
- • g when compared to industry average.
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Chapter 14 Solutions
Managerial Accounting
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