Problem 18-1A Comparative statement data for Farris Company and Ratzlaff Company
ID: 2404351 • Letter: P
Question
Problem 18-1A Comparative statement data for Farris Company and Ratzlaff Company, two competitors, appear below. All balance sheet data are as of December 31, 2017, and December 31, 2016 Farris Company Ratzlaff Company 2016 2016 2017 $1,560,000 1,070,000 304,200 $339,800 241,300 78,500 2,700 7,000 Net sales Cost of goods sold Operating expenses Interest expense Income tax expense Current assets Plant assets (net) Current liabilities Long-term liabilities Common stock, $10 par Retained earnings 8,800 55,000 323,500 $310,300 82,300 $79,200 522,000 497,600 138,900 125,400 74,400 36,600 29,400 89,600 29,000 25,200 497,500 497,500 120,000 120,000 175,000 146,400 35,600 30,000 64,800 108,200Explanation / Answer
Return on Asset :
ROA = Net Income/Total Assets
Net income of Farris for 2017 = $122,000
Average Total Assets for FArris =[ Current Assets(2017)+Fixed Assets(2017)+Current Assets (2016)+Fixed Assets(2016)]/2 = ($323,500+$522,000+$310,300+$497,600)/2 = $826,700
Farris ROA = $122,000/$826,700 = 0.1475 or 14.75%
Ratzlaff's ROA:
Average Total Assets for Ratzlaff =[ Current Assets(2017)+Fixed Assets(2017)+Current Assets (2016)+Fixed Assets(2016)]/2 = ($82,300+$138,900+$79,200+$125,400)/2 = $212,900
Ratzlaff ROA = $10,300/$212,900 = 0.04838 = 4.84%
Return on Equity:
ROE of Farris = Net Income / Total common Equity
Net Income = $122,000
Average Common Equity = [ Common stock(2017)+Retained Earnings(2017)+Common stock (2016)+Retained Earnings(2016)]/2
Average Common stock of Farris = ($497,500+$175,000+$497,500+$146,400)/2 = $658,200
ROE of FARRIS = $122,000/$658,200 = 0.185354 = 18.54%
ROE of Ratzlaff:
Net Income = $10,300
Average Common Equity = [ Common stock(2017)+Retained Earnings(2017)+Common stock (2016)+Retained Earnings(2016)]/2
Average Common stock of Farris = ($120,000+$35,600+$120,000+$30,000)/2 = $152,800
ROE of Ratzlaff: = $10,300/$152,800 = 0.067408 or 6.74%
Condensed Income Statement For the Year Ended December 31, 2017 Farris Company Ratzlaff Company Particulars Dollars ($) Percentage Dollars Percentage Net Sales 15,60,000 100% 3,39,800 100% Cost of Goods Sold 10,70,000 68.59% 2,41,300 71.01% Gross Profit 4,90,000 31.41% 98,500 28.99% Operating Expense 3,04,200 19.50% 78,500 23.10% Income from Operations 1,85,800 11.91% 20,000 5.89% Other Expenses and Losses Interest Expense 8,800 0.56% 2,700 0.79% Income Before Tax (EBT) 1,77,000 11.35% 17,300 5.09% Income Tax Expense 55,000 3.53% 7,000 2.06% Net Income 1,22,000 7.82% 10,300 3.03%