Question

Comparative statement data for Farris Company and Ratzlaff Company, two competitors, appear below. All balance sheet data are as of December 31, 2017, and December 31, 2016. Farris Company Ratzlaff Company 2017 2016 2017 2016 Net sales $1,549,035 $339,038 Cost of goods sold 1,080,490 241,000 Operating expenses 302,275 79,000 Interest expense 8,980 2,252 Income tax expense 54,500 6,650 Current assets 325,975 $312,410 83,336 $79,467 Plant assets (net) 521,310 500,000 139,728 125,812 Current liabilities 65,325 75,815 35,348 30,281 Long-term liabilities 108,500 90,000 29,620 25,000 Common stock, $10 par 500,000 500,000 120,000 120,000 Retained earnings 173,460 146,595 38,096 29,998 Prepare a vertical analysis of the 2017 income statement data for Farris Company and Ratzlaff Company in columnar form. Compute the return on assets and the return on common stockholders’ equity ratios for both companies.

Answer 1

Solution 1:

Farris Company Vertical Analysis - Income Statement For the year ended 2017
Particulars	Amount	Percent
Net Sales	$1,549,035.00	100.0%
Cost of goods sold	$1,080,490.00	69.8%
Gross Profit	$468,545.00	30.2%
Operating expenses	$302,275.00	19.5%
Operating income	$166,270.00	10.7%
Interest expense	$8,980.00	0.6%
Earning before taxes	$157,290.00	10.2%
Income tax expense	$54,500.00	3.5%
Net Income	$102,790.00	6.6%

Ratzlaff Company Vertical Analysis - Income Statement For the year ended 2017
Particulars	Amount	Percent
Net Sales	$339,038.00	100.0%
Cost of goods sold	$241,000.00	71.1%
Gross Profit	$98,038.00	28.9%
Operating expenses	$79,000.00	23.3%
Operating income	$19,038.00	5.6%
Interest expense	$2,252.00	0.7%
Earning before taxes	$16,786.00	5.0%
Income tax expense	$6,650.00	2.0%
Net Income	$10,136.00	3.0%

Solution 2:

Return on assets = Net Income / Average total assets

Average total assets = (Beginning assets + Ending assets)/2

Farris company = ($847,285 + $812,410)/2 = $829,847.50

Ratzlaff company = ($223,064 + $205,279)/2 = $214,171.50

Return on assets:

Farris company = $102,790 / $829,847.50 = 12.39%

Ratzlaff company = $10,136 / $214,171.50 = 4.73%

Return on common stockholder equity = Net Income / Average stockholder equity

Average common stockholder equity = (Beginning common stockholder's equity + Ending common stockholder's equity) / 2

Farris company = ($673,460 + $646,595)/2 = $660,027.50

Ratzlaff company = ($158,096 + $149,998)/2 = $154,047

Return on common stockholder equity:

Farris company = $102,790 / $660,027.50 = 15.57%

Ratzlaff company = $10,136 / $154,047 = 6.58%