Q9SE - Horngren'S Financial And Managerial Accounting

Question

Measuring profitability

Requirements

1. Compute the profit margin ratio for Accel’s Companies for 2018.

2. Compute the rate of return on total assets for 2018.

3. Compute the asset turnover ratio for 2018.

4. Compute the rate of return on common stockholders’ equity for 2018.

5. Are these rates of return strong or weak? Explain your reasoning.

Step-by-Step Solution

Answer

Answer

The Return on equity, Profit margin are strong enough where the Return on asset requires more improvement.

Step 1: Calculations

Requirement 1

A	Net Income	7300
B	Net Sales	40600
C	Profit Margin Ratio	17.98%

Step 2: Return on Total Assets %

Requirement 2

A	Net Income	Return on Total Assets
D	Total Assets 2018	82800
E	Total Assets 2017	54200
F=(D+E)/2	Average Total Assets	68500
G=A/F	Return on Total Assets	10.66%

Requirement 3

B	Net Sales	40600
F	Average Total Assets	40600
H= B/F	Asset Turnover Ratio	0.59

Step 3: Return on Equity % calculations

Requirement 4

A	Net Income	7300
I	Total Equity 2018	40900
J	Total Equity 2017	30700
K=(I+J)/2	Average Shareholder’s Equity	35800
K=(I+J)/2	Return on Equity	20.39%

Step 4: Explanations

Requirement 5

The rate of return on total assets is 10.66% and the Rate of return on equity is 20.39%. The return generated on equity used is good as it is above 20% and keeping the rate the return would be recouped in 5 years around. Return on assets is at a reasonable rate. Though there is a chance for improvement as it is not that higher. The asset turnover is 0.59 which means the sales generated using the asset are too low. So, there is an underutilization of resources and the same is not that good. The profit margin is good enough and keeping the focus on generating more profit keeping the same range of return level the company would be able to grow and yield a very high level of return. So, the Return on equity, Profit margin are strong enough that the Return on asset requires more improvement.