Fall 2017-18 Final Examination SECTION C (24 marks) Attempt any TWO question fro
ID: 2592459 • Letter: F
Question
Fall 2017-18 Final Examination SECTION C (24 marks) Attempt any TWO question from the following Oues CIGiven below is the comparative statement for Desan and Gerald who happen be a competitor Gerald Company Dean Company 2016 2015 2016 2015 Net sales 350,000 $1,200, Cost of goods sold 175,000 Operating expenses72,000 Interest expense5,000 Income tax Current assets Plant assets (net) Current liabilities 648,000 266 10,000 54,000 700,000 $650,000 expense 22,000 130,000 $100,000 400,000 | 270,000 | L 1,000,000 750,000 250,000 275,000 Long-term liabilities Common stock 60,000 58,000 50,000| 72,000 340,000 200,000 200,000 150,000 950,000 700,000 Retainedearmings-1-80,0001-40,00011 300,0001 275,0001 (4 marks) i. Prepare vertical analysis of the 2016 Compute the return of assets for both the companies and comment on the relative profitability of the company ii. (4 marks) Page 6 ofExplanation / Answer
When performing a Vertical Analysis of an Income Statement, Net Sales is taken as basis for which all other items are compared. All other items in the Income Statement are divided by the Net Sales.
When performing a Vertical Analysis of an Balance sheet, Total assets or total liability is taken as basis for which all other items are compared. All assets are divided by Total Assets and liability by Total liability.
Income statement as on 2016
Dean Company
Particulars
$ Totals
Percent
Net Sales
$350,000
100%
Less:Cost of goods sold
175,000
50%
Gross Margin
175,000
50%
Less:Operating expenses
72,000
21%
Operating profit before interest and taxes
$103,000
29%
Less:Interest expenses
$5,000
1%
Earning before taxes
$98,000
28%
Less:Income taxes
$22,000
6%
Net profit
76,000
22%
Balance Sheet as on 2016
Dean Company
Assets
$ Totals
Percent
Plant Assets
400,000
75%
Current Assets
$130,000
25%
Total assets
530,000
100%
Liabilities
Capital stock
340,000
64%
Retained earnings
80,000
15%
Current Liability
60,000
11%
Long term liability
50,000
9%
Total Liability
530,000
100%
Income statement as on 2016
Gerald Company
Particulars
$ Totals
Percent
Net Sales
1,200,000
100%
Less:Cost of goods sold
648,000
54%
Gross Margin
552,000
46%
Less:Operating expenses
266,000
22%
Operating profit before interest and taxes
286,000
24%
Less:Interest expenses
10,000
1%
Earning before taxes
276,000
23%
Less:Income taxes
54,000
5%
Net profit
222,000
19%
Balance Sheet as on 2016
Gerald Company
Assets
$ Totals
Percent
Plant Assets
1,000,000
59%
Current Assets
$700,000
41%
Total assets
1,700,000
100%
Liabilities
Capital stock
950,000
56%
Retained earnings
300,000
18%
Current Liability
250,000
15%
Long term liability
200,000
12%
Total Liability
1,700,000
100%
Answer:2.Return on assets (ROA) is calculated as the ratio of its net income in a given period to the total value of its assets.
Return on Assets=Net income/Average Total Assets
Dean Co=$76,000/$450,000=17%
Gerald Co=$222,000/15,50,000=14%
Income statement as on 2016
Dean Company
Particulars
$ Totals
Percent
Net Sales
$350,000
100%
Less:Cost of goods sold
175,000
50%
Gross Margin
175,000
50%
Less:Operating expenses
72,000
21%
Operating profit before interest and taxes
$103,000
29%
Less:Interest expenses
$5,000
1%
Earning before taxes
$98,000
28%
Less:Income taxes
$22,000
6%
Net profit
76,000
22%
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