Q23PGB - Horngren'S Financial And Managerial Accounting

Question

Net sales revenue, net income, and common stockholders’ equity for Eyesight Mission Corporation, a manufacturer of contact lenses, follow for a four-year period.

 

	2019	2018	2017	2016
Net Sales Revenue	\(766000	\)708000	\(644000	\)664000
Net Income	60000	38000	36000	44000
Ending Common Stockholder’s Equity	368000	352000	326000	296000

 

 Requirements

1. Compute trend analyses for each item for 2017–2019. Use 2016 as the base year, and round to the nearest whole percent.

2. Compute the rate of return on common stockholders’ equity for 2017–2019, rounding to three decimal places.

 

Step-by-Step Solution

Answer

1) Trend analysis shown in Step 2. 

(2) Rate of return for year 2017-2019 equals 11.576%, 11.209% and 16.667%, respectively.

Step1:Definition of Trend Analysis

It is a method of making comparative study of financial statements over a series of accounting year. More specifically its a statistical device of identifying direction, speed and extends of trends in individual items in financial statements over a long period of time.It is calculated as follows:

$\mathbf{Trend}\mathbf{\%}\mathbf{=}\frac{\mathbf{Accountingnumberofcurrentyear}}{\mathbf{Accountingnumberofbaseyear}}\mathbf{\times }\mathbf{100}$

Step2: Calculations of Trend Analysis

 Net revenue, net income and ending common stockholder’s equity as follows:

Calculate trend analysis for each item for 2017-2019 by using 2016 as the base year:

Particulars	2019	2018	2017	2016
Net Sales Revenue	$766000	$708000	$644000	$664000
Trend% for net revenues	115%	107%	97%	100%
Net income	$60000	$38000	$36000	$44000
Trend % for net income	136%	86%	82%	100%

 

Step3:Notes

Note: Using 2016 as the base year.

Step4: Calculation of rate of return on common stockholders’ equity

Calculate rate of return on common equity for 2017-2019:

 For 2019:

 $\begin{array}{rcl}\mathbf{Rateofreturnonequity}& \mathbf{=}& \frac{\mathbf{Netincome}\mathbf{-}\mathbf{-}\mathbf{Preferreddividend}}{\mathbf{Averagecommonshareoutstanding}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{60}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{0}}{\left(\frac{\$352,000+\$368,000}{2}\right)}\\ \mathbf{ }& \mathbf{=}& \mathbf{16}\mathbf{.}\mathbf{667}\mathbf{\%}\end{array}$

For 2018:

 $\begin{array}{rcl}\mathbf{Rateofreturnonequity}& \mathbf{=}& \frac{\mathbf{Netincome}\mathbf{-}\mathbf{-}\mathbf{Preferreddividend}}{\mathbf{Averagecommonshareoutstanding}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{38000}\mathbf{-}\mathbf{\$}\mathbf{0}}{\left(\frac{\$326,000+\$352,000}{2}\right)}\\ \mathbf{ }\mathbf{ }\mathbf{ }& \mathbf{=}& \mathbf{11}\mathbf{.}\mathbf{209}\mathbf{\%}\end{array}$

 

For 2017:

  $\begin{array}{rcl}\mathbf{Rateofreturnonequity}& \mathbf{=}& \frac{\mathbf{Netincome}\mathbf{-}\mathbf{-}\mathbf{Preferreddividend}}{\mathbf{Averagecommonshareoutstanding}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{36000}\mathbf{-}\mathbf{\$}\mathbf{0}}{\left(\frac{\$296,000+\$326,000}{2}\right)}\\ \mathbf{ }\mathbf{ }& \mathbf{=}& \mathbf{11}\mathbf{.}\mathbf{576}\mathbf{\%}\end{array}$