Question

Presented here are the comparative balance sheets of Hames Inc. at December 31, 2020 and 2019. Sales for the year ended December 31, 2020, totaled $690,000. HAMES INC. Balance Sheets December 31, 2020 and 2019 2020 2019 $ 19,000 78,000 103,000 $ 200,000 50,000 125,000 (65,000) $ 310,000 $ 20,000 72,000 99,000 $191,000 40,000 110,000 (60,000) $ 281,000 Assets Cash Accounts receivable Merchandise inventory Total current assets Land Plant and equipment Less: Accumulated depreciation Total assets Liabilities Short-term debt Accounts payable Other accrued liabilities Total current liabilities Long-term debt Total liabilities Stockholders' Equity Common stock, no par, 100,000 shares authorized 40,000 and 25,000 shares issued, respectively Retained earnings: Beginning balance Net income for the year Dividends for the year Ending balance Total stockholders' equity Total liabilities and stockholders' equity $ 18,000 64,000 20,000 $ 102,000 22,000 $ 124,000 $ 17,000 75,500 18,000 $ 110,500 30,000 $ 140, 500 $ 74,000 $ 59,000 $ 81,500 50,500 (20,000) $ 112,000 $ 186,000 $ 310,000 $ 85,000 1,500 (5,000) $ 81,500 $ 140,500 $ 281,000

Answer 1

a.ROI = MARGIN X TURNOVER

We will calculate Margin

(1) Margin = Net Income/ sales

=$50,500/$690,000

=7.3188%......(1)

(2) TURNOVER

SALES / AVERAGE TOTAL ASSETS

=$690,000/ [($281,000+$310,000)/2]

=$690,000/$2,95,500

=2.3350........(2)

ROI = (1)*(2)

7.31888*2.3350

=17.09%

(b) ROE = NET INCOME/AVERAGE OWNER'S EQUITY

=$50,500/ [($186,000+$140,500)/2]

=$50,500/$163,250

=30.93%

(C) WORKING CAPITAL = CURRENT ASSETS -CURRENT LIABILITIES

=$200,000-$102,000

=$98,000

(D) CURRENT RATIO = CURRENT ASSETS/CURRENT LIABILITIES

=$200,000/$102,000

=1.96

(E) ACID TEST RATIO = cash+cash equivalent+account receivable/current liabilities

=$19,000+$78,000/$102,000

=0.95

(f) when accounts payable are paid

cash is credited (reduction in current assets)

account payable is debited (reduction in current liability)

ROI	INCREASE	TOTAL ASSET WILL REDUCE SO DENOMINATOR TO ROI FORMULA WILL REDUCE AS A RESULT ROE WILL INCREASE
ROE	NO EFFECT	AS THIS RATIO DOES NOT TAKE INTO ACCOUNT CURRENT ASSETS AND CURRENT LIABILITIES , IT WILL HAVE NO EFFECT ON THIS.
CURRENT RATIO	NO EFFECT	CURRENT ASSETS REDUCE AND CURRENT LIABILITIES REDUCED SO IT WILL MAKE NET EFFECT NIL.
WORKING CAPITAL	NO EFFECT	CURRENT ASSETS REDUCE AND CURRENT LIABILITIES REDUCED SO IT WILL MAKE NET EFFECT NIL.

(G) WHEN ACCOUNT RECEIVABLE PAYS to us

WE WILL DEBIT CASH (INCREASE IN CASH)

WE WILL CREDIT ACCOUNT RECEIVABLE IT WILL REDUCE ACCOUNT RECEIVABLE

ROI	No effect	Total asset will remain same as one asset is reduced(account receivable) and another asset is increased (Cash) so there will be no effect on ROI
ROE	NO EFFECT	As this ratio does not take into account current assets there will be no effect
CURRENT RATIO	NO EFFECT	Total current asset will remain same as one asset is reduced(account receivable) and another asset is increased (Cash) so there will be no effect on total current assets and current ratio
WORKING CAPITAL	NO EFFECT	Total current asset will remain same as one asset is reduced(account receivable) and another asset is increased (Cash) so there will be no effect on total current assets and working capital