I need help with the return on asset ratio and the asset turnover ratio. On Janu
ID: 2432027 • Letter: I
Question
I need help with the return on asset ratio and the asset turnover ratio.
On January 1, 2018, the general ledger of TNT Fireworks includes the following account balances Accounts Cash Accounts Receivable Allowance for Uncollectible Accounts Inventory Notes Receivable (5%, due in 2 years) Land Accounts Payable Common Stock Retained Earnings Debit Credit $ 60,500 28,600 $ 4,000 38,100 33,600 173,000 16,600 238,000 75,200 $ 333,800 333,800 Totals During January 2018, the following transactions occur: anuary 1 Purchase equipment for $21,300. The company estimates a residual value of $3,300 and a six-year service life January 4 Pay cash on accounts payable, $11,300 January 8 Purchase additional inventory on account, $100,900 January 15 Receive cash on accounts receivable, $23,800 January 19 Pay cash for salaries, $31,600 January 28 Pay cash for January utilities, $18,300 January 30 Firework sales for January total $238,000. All of these sales are on account. The cost of the units sold is $124,000 The following information is available on January 31, 2018 a. Depreciation on the equipment for the month of January is calculated using the straight-line method. At the time the equipment was purchased, the company estimated a residual value of $3,000 and a two-year service life b. At the end of January, $4,800 of accounts receivable are past due, and the company estimates that 50% of these accounts will not be collected. Of the remaining accounts receivable, the company estimates that 296 will not be collected. The note receivable of $33,600 is considered fully collectible and therefore is not included in the estimate of uncollectible accounts c. Accrued interest revenue on notes receivable for January d. Unpaid salaries at the end of January are $34,400 e. Accrued income taxes at the end of January are $10,800Explanation / Answer
Analysis
a) Return on Assets ratio = Net Income/Average Total Assets
Average Total Assets = (Beg total assets+Ending total assets)/2
= ($333,800+$480,230)/2 = $407,015
Return on Assets ratio = $15,630/$407,015 = 3.8%
True, the company is more profitable because its return on assets ratio is more than the average return on assets for the industry.
c) Asset Turnover ratio = Net Sales/Average Total Assets
= $238,000/$407,015 = 0.6 times
True, the company is more efficient at producing revenues with its assets because its asset turnover ratio is more than industry average asset turnover of 0.4 times.