Question

Question 2 (Total marks= 20) Adams Corporation manufactures fasteners. The company's income statements for three years are indicated in Exhibit 1. The balance Sheets for the same period are shown in Exhibit 2. Exhibit 1 ADAMS CORPORATION Income Statement 2017 Sales (all on credit). $1,500,000 Cost of goods sold. 950,000 Gross profit........ 550,000 Selling and administrative expense. 380,000 Operating profit. 170,000 Interest expense. 30,000 Net income before taxes. 140,000 Taxes.......... 46,120 Net Income. $93,880 Shares.. 40,000 2018 $1,800,000 1,120,000 680,000 490,000 190,000 40,000 150,000 48.720 $101,280 40,000 2019 $2,160,000 1,300,000 860,000 590,000 270,000 85,000 185,000 64,850 $120,150 46,000 Exhibit 2 Cash...... 2018 2019 $30,000 $20,000 35,000 50,000 230,000 330,000 285.000 325,000 580,000 725,000 720,000 1,169,000 $1,300,000 $1,894,000 ADAMS CORPORATION Balance Sheet Assets 2017 $20,000 Marketable securities. 30,000 Accounts receivable. 150,000 Inventory...... 250,000 Total Current Assets. 450,000 Net Plant and equipment. 550,000 Total Assets $1,000,000 Liabilities & Equity Accounts payable. $100,000 Notes payable (bank). 100.000 Total Current liabilities 200,000 Long-term liabilities. 250,000 Total liabilities... 450,000 Common stock ($10 par). 400,000 Capital paid in excess of par. 50,000 Retained earnings........ 100,000 Total stockholders' equity 550.000 Total liabilities and stockholders' equity.. $1,000,000 $225,000 $200,000 100.000 300.000 325,000 500,000 331,120 550,740 656,120 1,050,740 400,000 460,000 50,000 80,000 193,880 303,260 643.880 843.260 $1,300,000 $1,894,000 (a) Using the Du Pont System, describe the changes in the return on assets from year to year and analyze the factors affecting the ROA. (8 marks)

Answer 1

Adams Corporation
Indexed Balance Sheet
Particulars	2017	2018	2019	2017	2018	2019
				%	%	%
Assets :
Cash	20,000	30,000	20,000	100.00%	150.00%	100.00%
Marketable Securities	30,000	35,000	50,000	100.00%	116.67%	166.67%
Accounts Receivable	150,000	230,000	330,000	100.00%	153.33%	220.00%
Inventory	250,000	285,000	325,000	100.00%	114.00%	130.00%
Total Current Assets:	450,000	580,000	725,000	100.00%	128.89%	161.11%
Net Plant & Equipment	550,000	720,000	1,169,000	100.00%	130.91%	212.55%
Total Assets	1,000,000	1,300,000	1,894,000	100.00%	130.00%	189.40%
Liabilities & Equity
Accounts payable	100,000	225,000	200,000	100.00%	225.00%	200.00%
Notes payable ( bank)	100,000	100,000	300,000	100.00%	100.00%	300.00%
Total current liabilities	200,000	325,000	500,000	100.00%	162.50%	250.00%
Long term Liabilities	250,000	331,120	550,740	100.00%	132.45%	220.30%
Total Liabilities	450,000	656,120	1,050,740	100.00%	145.80%	233.50%
Common Stock ($10)	400,000	400,000	460,000	100.00%	100.00%	115.00%
Capital paid in excess of par	50,000	50,000	80,000	100.00%	100.00%	160.00%
Retained earnings	100,000	193,880	303,260	100.00%	193.88%	303.26%
Total stockholders' equity	550,000	643,880	843,260	100.00%	117.07%	153.32%
Total Liabilities andStock holders' equity	1,000,000	1,300,000	1,894,000	100.00%	130.00%	189.40%
Yes the firm has improved it effeciency a lot . It has reached the ideal debt equity ratio almost. It is using debt funds to enhance the effeciency .
An indexed balance sheet is a horizontal analysis tool. It compares the year on year increase or decrease in each component
with respect to the earlier years. In short it compares the performance of two years.
Here 2017 will be our base year to compare the performance or changes in the year 2018 and 2019.
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