I guessed… where the !#%# did they get 95,300,000 from? I calculate avg equity as [(0.48*215,600,000) + 37,800,000] / 2 Wells Incorporated reported the following common size data for the year ended December 31, 20X7: Income Statement % Sales 100.0 Cost of goods sold 58.2 Operating expenses 30.2 Interest expense 0.7 Income tax 5.7 Net income 5.2 Balance sheet % % Cash 4.8 Accounts payable 15.0 Accounts receivable 14.9 Accrued liabilities 13.8 Inventory 49.4 Long-term debt 23.2 Net fixed assets 30.9 Common equity 48.0 Total assets 100.00 Total liabilities & equity 100.0 For 20X6, Wells reported sales of $183,100,000 and for 20X7, sales of $215,600,000. At the end of 20X6, Wells’ total assets were $75,900,000 and common equity was $37,800,000. At the end of 20X7, total assets were $95,300,000. Calculate Wells’ current ratio and return on equity ratio for 20X7. Current ratio Return on equity A.) 2.4 26.4% B.)4.6 25.2% C.)2.4 26.8% Your answer: A was incorrect. The correct answer was C) 2.4 26.8% The current ratio is equal to 2.4 [(4.8% cash + 14.9% accounts receivable + 49.4% inventory) / (15.0% accounts payable + 13.8% accrued liabilities)]. This ratio can be calculated from the common size balance sheet because the percentages are all on the same base amount (total). Return on equity is equal to net income divided by average total equity. Since this ratio mixes an income statement item and a balance sheet item, it is necessary to convert the common-size inputs to dollars. Net income is $11,211,200 ($215,600,000 × 5.2%) and average equity is $41,772,000 [($95,300,000 × 48.0%) + $37,800,000] / 2. Thus, 2007 ROE is 26.8% ($11,211,200 net income / $41,772,000 average equity).
equity is a % of assets not sales. end of 07 assets= $95,300,000 .48*95,300,000
blah, i need to go to sleep
One more for you… man I’m about fried for the night. I agree with the calculation relating to inventory, but didn’t they leave out the increase in NI from the dec in COGS, which is 1500, or 900 after tax (1500*0.6) to result in total change in equity of 3300, which is not a choice? An analyst gathers the following information about a firm: * Last in, first out (LIFO) inventory = $10,000 * Beginning LIFO reserve = $2,500 * Ending LIFO reserve = $4,000 * LIFO cost of goods sold = $15,000 * LIFO net income = $1,500 * Tax rate is 40% To convert the financial statements to a FIFO basis, the amount the analyst should add to the stockholders’ equity is closest to: A) $2,400. B) $2,800. C) $4,000. Your answer: B was incorrect. The correct answer was A) $2,400. If the firm had used FIFO inventory cost, tax liability would be higher by (LIFO reserve × tax rate) and retained earnings would be higher by [LIFO reserve × (1 − tax rate)]. (LIFO reserve)(1 − t) = $4,000(1 − 0.4) = $2,400
yea…its 4000(1-.40) = 2400…
remember adjust BS w/ lifo reserve adjust IS w/ change in lifo reserve it helped a lot…at least for me
Right, I get that. But if you adjust the IS by change in LReserve after tax (1500)*0.6, isn’t that going to flow to equity too?
Sorry gonna have to bump this because I’ve run into multiple problems like this. I know you add the post tax ending Lres for balance sheet purposes, but isn’t the change in lres which lowers cogs, and increases NI (when going to FIFO), resultant in the same effect on equity post tax?