Question

Jolie Foster Care Homes Inc. shows the following data:

Year	Net Income	Total assets	Stockholder’s Equity	Total debts
20X1	\(155,000	\)2,390,000	\(761,000	\)1,629,000
20X2	191,000	2,700,000	966,000	1,734,000
20X3	208,000	2,730,000	1,770,000	960,000
20X4	192,000	2,470,000	2,220,000	250,000

a. Compute the ratio of net income to total assets for each year and commenton the trend.

Short answer

The net income to total assets ratio of the company is:

Year	Net income to total asset ratio
20X1	6.49%
20X2	7.07%
20X3	7.62%
20X4	7.77%

The trend of net income to total asset ratio of Jolie foster care homes Inc. is increasing due to a higher increase in net income of the company than the corresponding increase in its total assets.

Step-by-step solution

Net Income to total assets ratio for the year ending 20X1:

$\begin{array}{rcl}\mathrm{Net}\mathrm{income}\mathrm{to}\mathrm{total}\mathrm{asset}\mathrm{ratio}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Total}\mathrm{assets}}\\ & =& \frac{\$155,000}{\$2,390,000}\\ & =& 6.49\%\end{array}$

The net income to total assets ratio of the company for the year ending 20X1 is 6.49%

Net Income to total assets ratio for the year ending 20X2:

$\begin{array}{rcl}\mathrm{Net}\mathrm{income}\mathrm{to}\mathrm{total}\mathrm{asset}\mathrm{ratio}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Total}\mathrm{assets}}\\ & =& \frac{\$191,000}{\$2,700,000}\\ & =& 7.07\%\end{array}$

The net income to total assets ratio of the company for the year ending 20X2 is 7.07%

Net Income to total assets ratio for the year ending 20X3:

$\begin{array}{rcl}\mathrm{Net}\mathrm{income}\mathrm{to}\mathrm{total}\mathrm{asset}\mathrm{ratio}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Total}\mathrm{assets}}\\ & =& \frac{\$192,000}{\$2,730,000}\\ & =& 7.62\%\end{array}$

The net income to total assets ratio of the company for the year ending 20X3 is 7.62%.

Net Income to total assets ratio for the year ending 20X4:

$\begin{array}{rcl}\mathrm{Net}\mathrm{income}\mathrm{to}\mathrm{total}\mathrm{asset}\mathrm{ratio}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Total}\mathrm{assets}}\\ & =& \frac{\$192,000}{\$2,470,000}\\ & =& 7.77\%\end{array}$

The net income to total assets ratio of the company for the year ending 20X4 is 7.77%. In addition, there is an upward movement in return on assets over the four-year period.