Question

1. complete the following: (use yellow ruled pad for your computation.)

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$$\begin{array}{lrr} & \\text{amount} & \\text{percent} \\\\ \\text{sales} & \\text{p } 325\\,000 & \\\\ \\text{sales returns} & 3\\,000 & \\\\ \\text{sales ret. \\& allow} & 2\\,000 & \\\\ \\text{net sales} & 320\\,000 & 100.00\\% \\\\ \\text{less: cost of sales} & 145\\,600 & \\\\ \\text{gross profit} & 174\\,400 & \\\\ \\text{operating expenses} & 105\\,200 & \\\\ \\text{net income before tax} & 69\\,200 & \\\\ \\text{income tax} & 24\\,220 & \\\\ \\text{net income after tax} & \\text{p } 44\\,980 & \\\\ \\end{array}$$

1. using the data in (7) on the preceding page, compute for:

a. return on net sales (profit margin)
b. return on assets if average total assets is p150 000.00.

1. complete the following: (use separate sheet for your computation.)

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$$\begin{array}{lrrcc} & & & \\text{increase/(decrease)} \\\\ & 201\\text{b} & 201\\text{a} & \\text{amount} & \\text{percent} \\\\ \\text{accounts receivable} & \\text{p } 12\\,500 & \\text{p } 10\\,900 & & \\\\ \\text{inventories} & 30\\,500 & 36\\,240 & & \\\\ \\text{prepaid expenses} & 5\\,000 & 2\\,500 & & \\\\ \\text{accounts payable} & 22\\,600 & 25\\,400 & & \\\\ \\text{capital stock} & 120\\,000 & 90\\,000 & & \\\\ \\text{retained earnings} & 95\\,000 & 85\\,000 & & \\\\ \\end{array}$$

1. using the data in (7) and (9) above, compute for return on investment (roi).

Explanation:

🆕 New Concept Discovered: Financial Ratio Analysis
Measuring business performance using profitability and investment returns.

Step 1: Return on Net Sales (Profit Margin)

Return on Net Sales (also known as Profit Margin) measures how much net income a business generates as a percentage of its net sales.

Using the data from problem (7):

• Net Income after Tax = \(\text{P } 44,980\)
• Net Sales = \(\text{P } 320,000\)

$$ \text{Return on Net Sales} = \frac{\text{Net Income after Tax}}{\text{Net Sales}} \times 100 $$

$$ \text{Return on Net Sales} = \frac{44,980}{320,000} \times 100 \approx 14.06\% $$

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Step 2: Return on Assets (ROA)

Return on Assets measures how efficiently a company uses its assets to generate profit.

Using the data from problem (7) and (8b):

• Net Income after Tax = \(\text{P } 44,980\)
• Average Total Assets = \(\text{P } 150,000.00\)

$$ \text{Return on Assets} = \frac{\text{Net Income after Tax}}{\text{Average Total Assets}} \times 100 $$

$$ \text{Return on Assets} = \frac{44,980}{150,000} \times 100 \approx 29.99\% $$

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Step 3: Horizontal Analysis of Balance Sheet Items

To complete the table in problem (9), we calculate the change from the base year (\(201\text{A}\)) to the current year (\(201\text{B}\)).

• \(\text{Amount Change} = \text{Amount in } 201\text{B} - \text{Amount in } 201\text{A}\)
• \(\text{Percent Change} = \frac{\text{Amount Change}}{\text{Amount in } 201\text{A}} \times 100\)

Accounts Receivable

• \(\text{Amount Change} = 12,500 - 10,900 = 1,600\)
• \(\text{Percent Change} = \frac{1,600}{10,900} \times 100 \approx 14.68\%\)

Inventories

• \(\text{Amount Change} = 30,500 - 36,240 = -5,740\)
• \(\text{Percent Change} = \frac{-5,740}{36,240} \times 100 \approx -15.84\%\)

Prepaid Expenses

• \(\text{Amount Change} = 5,000 - 2,500 = 2,500\)
• \(\text{Percent Change} = \frac{2,500}{2,500} \times 100 = 100.00\%\)

Accounts Payable

• \(\text{Amount Change} = 22,600 - 25,400 = -2,800\)
• \(\text{Percent Change} = \frac{-2,800}{25,400} \times 100 \approx -11.02\%\)

Capital Stock

• \(\text{Amount Change} = 120,000 - 90,000 = 30,000\)
• \(\text{Percent Change} = \frac{30,000}{90,000} \times 100 \approx 33.33\%\)

Retained Earnings

• \(\text{Amount Change} = 95,000 - 85,000 = 10,000\)
• \(\text{Percent Change} = \frac{10,000}{85,000} \times 100 \approx 11.76\%\)

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Step 4: Return on Investment (ROI)

Return on Investment (ROI) measures the return generated on the total equity invested by the shareholders (Capital Stock + Retained Earnings).

First, we find the average total stockholders' equity using the data from (9):

• \(\text{Total Equity } 201\text{A} = \text{Capital Stock} + \text{Retained Earnings} = 90,000 + 85,000 = 175,000\)
• \(\text{Total Equity } 201\text{B} = \text{Capital Stock} + \text{Retained Earnings} = 120,000 + 95,000 = 215,000\)
• \(\text{Average Total Equity} = \frac{175,000 + 215,000}{2} = 195,000\)

Now, we calculate ROI using the Net Income after Tax from (7):

• Net Income after Tax = \(\text{P } 44,980\)

$$ \text{ROI} = \frac{\text{Net Income after Tax}}{\text{Average Total Equity}} \times 100 $$

$$ \text{ROI} = \frac{44,980}{195,000} \times 100 \approx 23.07\% $$

Answer:

8. Financial Ratios

• a. Return on net sales (profit margin): \(14.06\%\)
• b. Return on assets: \(29.99\%\)

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9. Completed Table

Account	201B	201A	Increase/(Decrease) Amount	Increase/(Decrease) Percent
Inventories	\(30,500\)	\(36,240\)	\((5,740)\)	\((15.84\%)\)
Prepaid Expenses	\(5,000\)	\(2,500\)	\(2,500\)	\(100.00\%\)
Accounts Payable	\(22,600\)	\(25,400\)	\((2,800)\)	\((11.02\%)\)
Capital Stock	\(120,000\)	\(90,000\)	\(30,000\)	\(33.33\%\)
Retained Earnings	\(95,000\)	\(85,000\)	\(10,000\)	\(11.76\%\)

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10. Return on Investment (ROI)

• ROI: \(23.07\%\)