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38) On January 1, 2011, XYZ Company bought a new, $2,000,000 mainframe computer.
Because of rapid changes in technology and XYZ’s plans for growth, the computer has only a
five-year useful life and no salvage value. The chief financial officer for XYZ has decided that
the company should depreciate the computer using the straight-line method rather than the
double-declining balance method.
1. Calculate depreciation expense for 2011 using the straight-line method.
2. Calculate depreciation expense for 2011 using the double-declining balance method.
3. What would the difference be in 2011 net income for XYZ if it chooses the straight-line
method rather than double-declining balance?
4. Is it ethical for the chief financial officer to choose the straight-line method?
39) Identify each of the assets listed below with the appropriate classification:
A = Balance sheet, Current asset section
B = Balance sheet, Property, plant, and equipment section
C = None of the above
______ 1. Accumulated depreciation, equipment
______ 2. Depreciation expense
______ 3. Land
______ 4. Machinery
______ 5. Building
______ 6. Cash
______ 7. Notes receivable, due in 9 months
______ 8. Office supplies
______ 9. Trucks
______ 10. Sales
______ 11. Inventory
______ 12. Cost of goods sold
______ 13. Goodwill
______ 14. Computers
______ 15. Office furniture
40) Classify each of the items below according to the section of a firm’s financial statements in
which it would be reported. Some sections may be used more than once and others may not be
used at all.
A = current asset C = current liability E = revenue
B = long-term asset D = long-term liability F = expense
_____ 1. Amortization expense
_____ 2. Land
_____ 3. Copyrights
_____ 4. Furniture and fixtures
_____ 5. Computer supplies
_____ 6. Depreciation expense
_____ 7. Accumulated depreciation
Learning Objective 6-7
1) Use the following selected information from PDG Corporation to determine the return on
assets for the year.
Beginning total assets
$300,000
Ending total assets
$350,000
Sales revenue
$900,000
Total operating expenses
$800,000
Interest
$15,000
Net income
$85,000
A) 15%
B) 276.92%
C) 26.15%
D) 30.77%
2) Use the following selected information from PDG Corporation to determine the asset turnover
ratio for the year.
Beginning total assets
$300,000
Ending total assets
$350,000
Sales revenue
$900,000
Total operating expenses
$800,000
Interest
$15,000
Net income
$85,000
A) 0.15
B) 2.77
C) 0.26
D) 0.31
3) Use the following selected information from XYZ Corporation to determine the return on
assets for the year.
Beginning total assets
$150,000
Ending total assets
$130,000
Net income
$65,000
Interest
$5,000
Total revenue
$270,000
Total operating expenses
$200,000
A) 50%
B) 25%
C) 35%
D) 46%
4) Use the following selected information from XYZ Corporation to determine the asset turnover
ratio for the year.
Beginning total assets
$150,000
Ending total assets
$130,000
Net income
$65,000
Interest
$5,000
Total revenue
$270,000
Total operating expenses
$200,000
A) 0.50
B) 2.25
C) 0.35
D) 1.93
5) Use the following selected information from ABC Corporation to determine the return on
assets for the year.
Total revenues
$100,000
Total operating expenses
$65,000
Interest
$6,000
Beginning total assets
$500,000
Ending total assets
$440,000
Ending retained earnings
$300,000
A) 21.3%
B) 6.17%
C) 16. 7%
D) 7.45%
6) Use the following selected information from ABC Corporation to determine the asset turnover
ratio for the year.
Total revenues
$100,000
Total operating expenses
$65,000
Interest
$6,000
Beginning total assets
$500,000
Ending total assets
$440,000
Ending retained earnings
$300,000
A) 0.21
B) 1.00
C) 0.17
D) 0.75
7) Which statement below best describes the meaning of return on assets (ROA)?
A) It answers the question: “How much profit does the company have for each dollar of
revenues?”
B) It is the percentage of profit earned from collecting accounts receivable.
C) It indicates how well management uses a company’s assets to generate net income.
D) It measures the leverage during a period.
8) Use the following selected information from Alpha Corporation to determine the return on
assets for the year.
Total revenues
$200,000
Total operating expenses
$155,000
Dividends
$5,000
Beginning total assets
$100,000
Ending total assets
$120,000
Ending retained earnings
$300,000
A) 181.8%
B) 36.4%
C) 40.9%
D) 37.5%
9) Use the following selected information from Alpha Corporation to determine the asset
turnover ratio for the year.
Total revenues
$200,000
Total operating expenses
$155,000
Dividends
$5,000
Beginning total assets
$100,000
Ending total assets
$120,000
Ending retained earnings
$300,000
A) 1.82
B) 0.36
C) 0.41
D) 0.33
10) Return on assets is a ratio used to evaluate how effectively assets generate sales.
11) Return on assets is a ratio used to evaluate how effectively assets generate income.
12) Asset turnover is a ratio used to evaluate how effectively assets generate sales.
13) Asset turnover is a ratio used to evaluate how effectively assets generate income.
14) How do financial analysts evaluate how well a business uses its assets?
15) The following information is provided for two companies in the same industry:
ABC, Inc.
XYZ, Inc.
Net income
$250,000
$400,000
Total sales
$650,000
$800,000
Total expenses
$400,000
$400,000
Beginning total assets
$400,000
$1,000,000
Ending total assets
$500,000
$1,200,000
Required:
1. Calculate the return on assets (ROA) for both companies. Show supporting calculations. Show
your answer as a percentage with one decimal place. (For example, 0.50000 = 50.0%).
ABC, Inc.
XYZ, Inc.
2. Calculate the asset turnover for both companies. Show supporting calculations. Round your
answer to two decimal places. (For example, 0.98765 = 0.99)
ABC, Inc.
XYZ, Inc.
3. Based on your calculations above, which company appears to be a better performer?
16) The following information is provided for two companies in the same industry:
TRW, Inc.
POD, Inc.
Net income
$50,000
$189,000
Total sales
$120,000
$389,000
Total expenses
$70,000
$200,000
Beginning total assets
$440,000
$1,000,000
Ending total assets
$560,000
$900,000
Required:
1. Calculate the return on assets (ROA) for both companies. Show supporting calculations. Show
your answer as a percentage with one decimal place. (For example, 0.50000 = 50.0%).
TRW, Inc.
POD, Inc.
2. Calculate the asset turnover for both companies. Show supporting calculations. Round your
answer to two decimal places. (For example, 0.98765 = 0.99)
TRW, Inc.
POD, Inc.
3. Based on your calculations above, which company appears to be a better performer?
17) The following information is available for Row, Inc.
2011
2012
2013
Net sales for the year ended December 31
$500,000
$600,000
Cost of goods sold for the year ended Dec. 31
$300,000
$360,000
Interest expense for the year ended Dec. 31
$ 2,000
$ 3,000
Net income for the year ended December 31
$ 52,500
$ 60,000
Total assets at December 31
$350,000
$400,000
$600,000
Total shareholders’ equity at December 31
$307,500
$360,000
$400,000
1. The return on assets for 2012 is ________________%, rounded to one decimal place.
2. The return on assets for 2013 is ________________%, rounded to one decimal place.
3. Was there an improvement in the return on assets?__________
4. The asset turnover ratio for 2012 is ______________, rounded to one decimal place.
5. The asset turnover ratio for 2013 is ______________, rounded to one decimal place.
6. Was there an improvement in the asset turnover ratio?_____________
18) Provide students with copies of real merchandising companies' annual reports, or give
students the Web addresses of real merchandising companies and ask them to print out the
annual reports.
Divide the class into teams of three or four people. All team members should work with the same
company's annual report. Give the students time in class to answer the following questions for
their company. Each team should turn in only one copy of the answers for grading, along with a
copy of the annual report that they used. All team members will receive the same grade.
1
What is the name of your company?
2
What is the date of your company’s most recent fiscal yearend?
3
Calculate the most recent year’s return on assets (round to the nearest tenth of
a percent).
4
Which of the audited financial statement(s) do you need to use to calculate
return on assets?
5
Calculate the most recent year’s asset turnover (round to the nearest tenth of a
percent).
6
Which of the audited financial statement(s) do you need to use to calculate
asset turnover?
7
Can you tell how much the company paid for its buildings?
8
Can you tell how much the land is worth (i.e., the market value) at yearend?
9
Are the long-term assets in general relatively new or used?
10
Can you tell whether the company purchased any long-term assets in the
current year?
11
How much cash was spent on the purchase of long-term assets during the most
recent year?
$
12
How much depreciation and amortization expense was recorded in the most
recent year?
$
13
Which depreciation method does the company use?
14
List two of its intangible assets.
