In: Accounting
Assets assigned to California Division for 2017 were as follows:
Assets Beg Balance End Balance
Cash $250,000 $260,000
Accounts receivable 120,000 135,000
Inventory 230,000 205,000
Plant and equipment (net) 420,000 380,000
Land (undeveloped)* 430,000 430,000
Total assets $1,450,000 $1,410,000
*The undeveloped land is purchased by the President of company in California for construction of future headquarter of the company, that is, Lisa is not accountable for it.
Income Statement
Sales $1,750,000
Cost of goods sold 1,170,000
Operating expenses 300,000
Operating income 280,000
Less interest and taxes:
Interest expense $96,000
Tax expense 70,000 166,000
Net income $114,000
1) Assess and report the performance of Lisa for the year 2018 by computing appropriate measures of
2) Explain the difference between ROI and Profit Margin Ratio by computing Profit Margin Ratio and ROInfor California division. What is each ratio measuring?
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1. Assess and report the performance of Lisa for the year 2018 | ||||||
Performance Measure: ROI and RI (Residual Income) | ||||||
ROI | Return/Investment | 114000/380000 | 30% | |||
(Land not to be considered as this is not only for california) | ||||||
RI | Operating Income-(Operating Assets)*Cost of Capital) | |||||
(since cost of capital not given, lets assume it 25%) | ||||||
280000-(380000*25%) | ||||||
185000 | ||||||
Since RI is positive and ROI is more than minimum return, performance is positive | ||||||
2.the difference between ROI and Profit Margin Ratio | ||||||
ROI | Return/Investment | 114000/380000 | 30% | ROI is a performance measure, used to evaluate the efficiency of an investment | ||
(Land not to be considered as this is not only for california) | ||||||
Profit Margin Ratio | Net Income/Sale | 114000/1750000 | 6.5% | indicates how much net income a company makes with total sales achieved. A higher net profit margin means that a company is more efficient at converting sales into actual profit. | ||