IL. (15 points) its fiscal years 2010 and 20n1 excerpts are from the Analytical
ID: 2581848 • Letter: I
Question
IL. (15 points) its fiscal years 2010 and 20n1 excerpts are from the Analytical Company's financial statements for Fiscal 2011 Fiscal 2010 $78,000 30,000 Net sales Cost of Net income $72,000 30,000 3,600 9,000 12,000 27.000 12,000 15,000 Total liabilities Total common stockholders' equity o00 15000 Required l: (6 points) Based on above information, calculate the following items (keep t decimal places) wo 1) Horizontal amount change (from 2010 to 2011) in net income: s 10O 7,500 2) Horizontal percentage change (from 2010 to 2011) in net income 3) Vertical percentage (in 2010) of cost of goods sold: Required 2: (9 points) Based on above information, calculate the company's ROA (i.e., the return on total assets ratio) and ROE (i.e., the return on common stockholders' equity ratio) for its fiscal 2011 (keep two decimal places). Was its ROE higher or lower than its ROA in 2011? ExplainExplanation / Answer
Required 1 :
1) Horizontal Amount Change in Net Income : $ 7,500 - $ 3,600 = $ 3,900
2) Horizontal Percentage Change in Net Income :
= Horizontal Amount Change in Net Income*100 / Net Income of fiscal year 2010
= $ 3,900 *100 / $ 3,600
= 108.33 %
3) Vertical Percentage ( in 2010 ) of cost of goods sold = Cost of goods sold * 100 / Total sales
= $ 30,000 * 100 / $ 72,000
= 41.67 %
Required 2 :
1) Company's ROA (Return on Total Assets Ratio) for fiscal year 2011 = Net Income * 100/ Total Assets
= $ 7,500 * 100/ $ 27,000
= 27.78 %
2) Company's ROE ( Return on Common stockholder's Equity Ratio ) for fiscal year 2011 =
= Net Income * 100 / Total common stockholder's Equity
= $ 7,500 * 100 / $ 15,000
= 50 %
3) ROE is higher than ROA
Explation : ROE and ROA both are calculated to check how effectively and efficiently a company is using resources to generate profit. Because of how these ratios are calculated, a company's return on equity should be higher than its return on assets. In a healthy company, the total value of owners' equity or stockholders' equity will always be less than the total value of its assets. The reason lies in the basic accounting equation: Assets = Liabilities + Equity. Rearrange the terms, and you get: Assets - Liabilities = Equity. Assets will always be greater than equity unless the company has no liabilities whatsoever (in which case assets and equity will be equal). Since the formulas for return on assets and return on equity both have the same numerator -- net income -- the formula with the larger denominator will produce the smaller result. That's return on assets.