Financial & Managerial Accounting
Financial & Managerial Accounting
13th Edition
ISBN: 9781285866307
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 15, Problem 15.5BPR

1.

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.

The following ratios for five years:

  1. (a) Rate earned on total assets
  2. (b) Return on stockholders’ equity
  3. (c) Times interest earned ratio
  4. (d) Ratio of total liabilities to stockholders’ equity

1.

Expert Solution
Check Mark

Explanation of Solution

Given info: Items of financial statement

a. Rate earned on total assets for five years (2012 to 2016)

Rate earned on total assets(2016)=Netincome + Interest expenseAverage total assets=$6,623,780$25,988,665=25.5%

Rate earned on total assets(2015)=Netincome + Interest expenseAverage total assets=$4,606,056$19,859,586=23.2%

Rate earned on total assets(2014)=Netincome + Interest expenseAverage total assets=$3,540,600$14,854,406=23.8%

Rate earned on total assets(2013)=Netincome + Interest expenseAverage total assets=$2,458,000$11,370,240=21.6%

Rate earned on total assets(2012)=Netincome + Interest expenseAverage total assets=$1,900,000$8,676,000=21.9%

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:

Rate of return on assets=Netincome + Interest expenseAverage total assets

b. Rate earned on stockholders’ equity for five years.

Rate earned on stockholders' equity(2016)}= Net income Average stockholder’s equity=$5,571,720$15,920,340=35.0%

Rate earned on stockholders' equity(2015)}= Net income Average stockholder’s equity=$3,714,480$11,277,240=32.9

Rate earned on stockholders' equity(2014)}= Net income Average stockholder’s equity=$2,772,000$8,034,000=34.5% Rate earned on stockholders' equity(2013)}= Net income Average stockholder’s equity=$1,848,000$5,724,000=32.3%

Rate earnedon stockholders' equity(2012)}= Net income Average stockholder’s equity=$1,400,000$4,100,000=34.1%

Rate earned on stockholders’ equity is used to determine the relationship between the net income and the average common equity that are invested in the company.

Formula: Rate earned on stockholders' equtiy }= Net incomeAverage  stockholder’s equity

c.Number of times interest charges are earned ratio for five years

Number of times-interest charges are earned ratio (2016) }=Net Income+Incometaxexpense+Interest expenseInterest expense=$7,849,352$1,052,060=7.5times

Number of times-interest charges are earned ratio (2015) }=Net Income+Incometaxexpense+Interest expenseInterest expense=$5,451,278$891,576=6.1times

Number of times-interest charges are earned ratio (2014) }=Net Income+Incometaxexpense+Interest expenseInterest expense=$4,180,920$768,600=5.4times

Number of times-interest charges are earned ratio (2013) }=Net Income+Incometaxexpense+Interest expenseInterest expense=$2,899,600$6,10,000=4.8times

Number of times-interest charges are earned ratio (2012) }=Net Income+Incometaxexpense+Interest expenseInterest expense=$2,220,000$500,000=4.4times

Number of times interest charges are 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: Number of times-interest charges are earned ratio }=Income before income tax+Interest expenseInterest expense

d. Ratio of liabilities to stockholders’ equity for five years (2012 to 2016)

 Ratio of liabilities to stockholders' equity(2016)}=Total liabilitiesStockholders' equity=$10,672,291$18,706,200=0.6

 Ratio of liabilities to stockholders' equity(2015)}=Total liabilitiesStockholders' equity=$9,464,359$13,134,480=0.7

 Ratio of liabilities to stockholders' equity(2014)}=Total liabilitiesStockholders' equity=$7,700,333$9,420,000=0.8

 Ratio of liabilities to stockholders' equity(2013)}=Total liabilitiesStockholders' equity=$5,940,480$6,648,000=0.9

 Ratio of liabilities to stockholders' equity(2012)}=Total liabilitiesStockholders' equity=$5,352,000$4,800,000=1.1

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:

 Ratio of liabilities to stockholders' equity=Total liabilitiesStockholders' equity

2.

To determine

To prepare: Analysis of graphs

2.

Expert Solution
Check Mark

Explanation of Solution

  • 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 when compared to industry average.

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Chapter 15 Solutions

Financial & Managerial Accounting

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