Question

The accounting department of your company has just delivered a draft of the current year's financial statements to you. The summary is as follows: Total Assets Total Liabilities Total Equity Net Income for the Year Common Shares Outstanding Beginning of the Year $550,000 210,000 340,000 End of the Year $645,000 212,000 433,000 97,500 21,000 21,000 You discovered that they have not adjusted for estimated bad debt expenses of $9,700. For each of the following ratios, calculate: 1. The ratio that would have resulted had the error not been discovered (i.e. the incorrect ratio). 2. The correct ratio. A D E B Incorrect с Correct: 1 2 3 ROA ROE Debt Ratio EPS 4 5 6 7 8 9 10

Answer 1

Incorrect Ratio:

Particulars	Formulas	Calculations	Answer
Return on Assets	Net income	$97,500	16.32%
Average total assets	($550,000+S645,000)/2
Return on Equity	Net income	$97,500	25.23%
Average Total Equity	($340,000+$433,000)/2
Debt Ratio	Total liabilites	$212,000	32.87%
Total assets	$645,000
Earnings per Share	Net income	$97,500	$4.64 per share
Common Shares outstanding	21,000shares

Correct Ratio:

Particulars	Formulas	Calculations	Answer
Return on Assets	Net income	$97,500-$9,700	14.81%
Average total assets	($550,000+[$645,000-$9,700])/2
Return on Equity	Net income	$97,500-$9,700	23.01%
Average Total Equity	($340,000+[$433,000-$9,700])/2
Debt Ratio	Total liabilites	$212,000	33.37%
Total assets	[$645,000-$9,700]
Earnings per Share	Net income	[$97,500-$9,700]	$4.18 per share
Common Shares outstanding	21,000shares