Question

Cullumber Company Oriole Company 2017 2016 2017 2016 Net sales $1,856,000 $596,000 Cost of goods sold 1,079,000 298,000 Operating expenses 263,000 83,000 Interest expense 7,000 2,800 Income tax expense 75,000 34,000 Current assets 590,015 $565,462 150,838 $ 143,835 Plant assets (net) 953,508 905,000 252,908 227,720 Current liabilities 120,048 137,225 63,980 54,809 Long-term liabilities 206,322 162,900 53,612 45,250 Common stock, $10 par 905,000 905,000 217,200 217,200 Retained earnings 312,153 265,337 68,954 54,296 Compute the 2017 return on assets and the return on common stockholders’ equity for both companies. (Round all ratios to 1 decimal place, e.g. 2.5%.)

Answer 1

Cullumber Company:

Average Total Assets = (Ending Current Assets + Ending Plant Assets + Beginning Current Assets + Beginning Plant Assets) / 2
Average Total Assets = ($590,015 + $953,508 + $565,462 + $905,000) / 2
Average Total Assets = $1,506,992.50

Average Common Stockholders’ Equity = (Ending Common Stock + Ending Retained Earnings + Beginning Common Stock + Beginning Retained Earnings) / 2
Average Common Stockholders’ Equity = ($905,000 + $312,513 + $905,000 + $265,337) / 2
Average Common Stockholders’ Equity = $1,193,925

Net Income = Net Sales - Cost of Goods Sold - Operating Expenses - Interest Expense - Income Tax Expense
Net Income = $1,856,000 - $1,079,000 - $263,000 - $7,000 - $75,000
Net Income = $432,000

Return on Assets = Net Income / Average Total Assets
Return on Assets = $432,000 / $1,506,992.50
Return on Assets = 28.67%

Return on Common Stockholders’ Equity = Net Income / Average Common Stockholders’ Equity
Return on Common Stockholders’ Equity = $432,000 / $1,193,925
Return on Common Stockholders’ Equity = 36.18%

Oriole Company:

Average Total Assets = (Ending Current Assets + Ending Plant Assets + Beginning Current Assets + Beginning Plant Assets) / 2
Average Total Assets = ($150,838 + $252,908 + $143,835 + $227,720) / 2
Average Total Assets = $387,650.50

Average Common Stockholders’ Equity = (Ending Common Stock + Ending Retained Earnings + Beginning Common Stock + Beginning Retained Earnings) / 2
Average Common Stockholders’ Equity = ($217,200 + $68,954 + $217,200 + $54,296) / 2
Average Common Stockholders’ Equity = $278,825

Net Income = Net Sales - Cost of Goods Sold - Operating Expenses - Interest Expense - Income Tax Expense
Net Income = $596,000 - $298,000 - $83,000 - $2,800 - $34,000
Net Income = $178,200

Return on Assets = Net Income / Average Total Assets
Return on Assets = $178,200 / $387,650.50
Return on Assets = 45.97%

Return on Common Stockholders’ Equity = Net Income / Average Common Stockholders’ Equity
Return on Common Stockholders’ Equity = $178,200 / $278,825
Return on Common Stockholders’ Equity = 63.91%