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Chapter 24: Question 26Q (page 1446)

What is the relationship of the asset turnover to the return on assets?

Short Answer

Expert verified

An increase in asset turnover while maintaining a stable profit margin leads to an increase in relation to returning on resources and vice versa.

Step by step solution

01

Meaning of Asset Turnover

Earnings are compared to the value of a company's transactions or resources in the asset turnover ratio. The asset turnover ratio can be used to assess how well a company uses its resources to generate revenue.

02

Explaining the relationship of the asset turnover to the return on assets

The following is the link between asset turnover and the rate of return on assets:

SalesAveragetotalsalesร—NetIncomeSales=NetincomeAveragetotalsales

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Most popular questions from this chapter

(Horizontal and Vertical Analysis) Presented below is the comparative balance sheet for Gilmour Company.

GILMOUR COMPANY

COMPARATIVE BALANCE SHEET

AS OF DECEMBER 31, 2018 AND 2017

December 31

2018

2017

Assets

Cash

\( 180,000

\) 275,000

Accounts receivable (net)

220,000

155,000

Short-term investments

270,000

150,000

Inventories

1,060,000

980,000

Prepaid expenses

25,000

25,000

Plant & equipment

2,585,000

1,950,000

Accumulated depreciation

(1,000,000)

(750,000)

\(3,340,000

(2,785,000)

Liabilities and Stockholdersโ€™ Equity

Accounts payable

\) 50,000

\( 75,000

Accrued expenses

170,000

200,000

Bonds payable

450,000

190,000

Common stock

2,100,000

1,770,000

Retained earnings

570,000

550,000

\)3,340,000

(2,785,000)

Instructions

(Round to two decimal places.)

  1. Of what value is the additional information provided in part (b)?

Identify the segment information that is required to be disclosed by GAAP.

(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.โ€™s operations.

(\(000 omitted)

2018

2017

2016

2015

2014

Sales revenue

\)20,000

\(16,000

\)14,000

\(6,000

\)4,000

Net income

2,400

14,000

800

700

250

Average total assets

22,000

19,000

11,500

4,200

3,000

Current assets

8,000

6,000

3,000

1,200

1,000

Working capital

3,600

3,200

1,200

500

400

Common shares:

Number of shares

Outstanding (000)

Average market price

2,000

\(9

2,000

\)6

2,000

$4

20

-

20

-

Instructions

  1. Comment on the appropriateness of declaring a cash dividend at this time, using the ratios computed in part (b) as a major factor in your analysis.

Explain the meaning of the following terms: (a) common size analysis, (b) vertical analysis, (c) horizontal analysis, and (d) percentage analysis.

What are the major types of subsequent events? Indicate how each of the following โ€œsubsequent eventsโ€ would be reported.

a) Collection of a note written off in a prior period.

b) Issuance of a large preferred stock offering.

c) Acquisition of a company in a different industry.

e) Destruction of a major plant in a flood.

f) Death of the companyโ€™s chief executive officer (CEO).

g) Additional wage costs associated with settlement of a four-week strike.

h) Settlement of a federal income tax case at considerably more tax than anticipated at year-end.

Change in the product mix from consumer goods to industrial goods.

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