Chapter 1, Problem 2BTN

1.

Summary Introduction

Introduction: The balance sheet is the financial statement of the company which shows the amount of assets, liabilities & equity of the company. The total assets of the company are equal to the amount of total liabilities plus equity of the company.

To calculate: The total amount of assets invested in (a) Apple and (b) google company.

Explanation of Solution

(a)

Liability plus equity: $231,839

The total amount of assets invested is calculated as follows:

  $\begin{array}{c}\text{Assets}\text{invested}=\text{Liability}+\text{equity}\\ =\$231,839\end{array}$

Therefore, the total amount of assets invested is $231,839.

(b)

Liability plus equity: $131,133

The total amount of assets invested is calculated as follows:

  $\begin{array}{c}\text{Assets}\text{invested}=\text{Liability}\text{plus}\text{equity}\\ =\$131,133\end{array}$

Therefore, the total amount of assets invested is $131,133.

2.

Summary Introduction

Introduction: The return on asset ratio is measured to check the efficiency of the company in using its assets in earning profits for the company. It is calculated by dividing the net income of the company by the total average assets of the company.

To calculate:The return on assets for (a) Apple and (b) google.

Explanation of Solution

(a)

Net income: $39,510

Beginning assets: $207,000

Ending assets: $231,839

Average assets are calculated as follows:

  $\begin{array}{c}\text{Average}\text{assets}=\frac{\text{beginning}\text{assets}+\text{ending}\text{assets}}{2}\\ =\frac{\$207,000+\$231,839}{2}\\ =\$219,419.5\end{array}$

Return on assets is calculated as follows:

  $\begin{array}{c}\text{Return}\text{on}\text{assets}=\frac{\text{net}\text{income}}{\text{average}\text{assets}}\times 100\\ =\frac{\$39,510}{\$219,419.5}\times 100\\ =18.00\%\end{array}$

Therefore, return on asset is 18.00%.

(b)

Net income: $14,444

Beginning assets: $110,920

Ending assets: $131,133

Average assets are calculated as follows:

  $\begin{array}{c}\text{Average}\text{assets}=\frac{\text{beginning}\text{assets}+\text{ending}\text{assets}}{2}\\ =\frac{\$110,920+\$131,133}{2}\\ =\$121,026.5\end{array}$

Return on assets is calculated as follows:

  $\begin{array}{c}\text{Return}\text{on}\text{assets}=\frac{\text{net}\text{income}}{\text{average}\text{assets}}\times 100\\ =\frac{\$14,444}{\$121,026.5}\times 100\\ =11.9\%\end{array}$

Therefore, return on asset is 11.9%.

The return on asset ratio of the company is 10.7% and the competitors have a return on asset ratio of 10%. It depicts that the company is more efficiently using its assets in generating profits for the company than its competitors. The company is more efficient than its competitors.

3.

Summary Introduction

Introduction: The income statement of a company is a financial statement which shows the amount of revenue, expenses and net profit earned by the company. The amount of expenses is calculated by deducting net income from the revenues of the company.

To calculate: The amount of expenses for (a) Apple and (b) google company.

Explanation of Solution

(a)

Net income: $39,510

Revenues & sales: $182,795$\begin{array}{c}\text{Expenses}=\text{revenue}\text{\&}\text{sales}-\text{net}\text{income}\\ =\$182,795-\$39,510\\ =\$143,285\end{array}$

Therefore, expenses are $143,285.

(b)

Net income: $14,444

Revenues & sales: $66,001$\begin{array}{c}\text{Expenses}=\text{revenue}\text{\&}\text{sales}-\text{net}\text{income}\\ =\$66,001-\$14,444\\ =\$51,557\end{array}$

Therefore, expenses are $51,557.

4.

Summary Introduction

Introduction:The return on asset ratio is measured to check the efficiency of the company in using its assets in earning profits for the company. It is calculated by dividing the net income of the company by the total average assets of the company.

To discuss: Thereturn on asset ratio calculated for (a) Apple and (b) Google.

Explanation of Solution

(a)

The return on asset for A company is 18.00%. In comparison to this, the average return on asset of competitors is 11%. This shows that the A company is much efficient in using its assets for earning profits for the company. This company earns higher profits than its competitors from using its assets.

(b)

The return on asset for G company is 11.9%. In comparison to this, the average return on asset of competitors is 11%. This shows that the A company is much efficient in using its assets for earning profits for the company. This company earns higher profits than its competitors from using its assets.

5.

Summary Introduction

Introduction: The balance sheet is the financial statement of the company which shows the amount of assets, liabilities & equity of the company. The income statement of a company is a financial statement which shows the amount of revenue, expenses and net profit earned by the company. These financial statements are used in assessing the financial standing of a company.

To conclude: About the A company and G company according to the calculations made.

Explanation of Solution

A company:

According to the calculations made, the A company is a good performing company. It is profit earning company and the company is efficient in using its assets for earning the profits. The return on asset ratio of the company shows that a major part of profit is earned through the efficient use of company’s assets. This company has good investment opportunities.

G company:

According to the calculations made, the G company is an average performing company. The profits of the company are less, and the expenses are more. The return on asset ratio is equal to the competitor’s return on asset. This company does not have much advantage in investment purposes.