Question

Consider the following condensed financial statements of Safe Money, Inc. The​ company's target rate of return is 20​%:

Safe Money, Inc.
Comparative Balance Sheet
As of December 31, 2018 and 2017
		2018	2017
	Assets
	Cash	$82,000	$71,000
	Accounts Receivable	61,600	27,500
	Supplies	400	500
	Property, Plant, and Equipment, net	299,000	197,000
	Patents, net	158,000	103,000
	Total Assets	$601,000	$399,000
	Liabilities and Stockholders' Equity
	Accounts Payable	$31,000	$33,000
	Short-term Notes Payable	149,000	49,000
	Long-term Notes Payable	199,000	129,000
	Common Stock, no Par	201,000	168,500
	Retained Earnings	21,000	19,500
	Total Liabilities and Stockholders' Equity	$601,000	$399,000

Safe Money, Inc.
Income Statement
For the Year Ended December 31, 2018
	Net Sales Revenue	$10,000,000
	Cost of Goods Sold	5,900,000
	Gross Profit	4,100,000
	Operating Expenses	3,800,000
	Operating Income	300,000
	Other Income and (Expenses):
	Interest Expense	(40,000)
	Income Before Income Tax Expense	260,000
	Income Tax Expense	91,000
	Net Income	$169,000

Requirement 1. Calculate the​ company's ROI. Round all of your answers to four decimal places.

Begin by selecting the formula to calculate return on investment​ (ROI), and then enter the amounts to calculate the​ company's ROI. ​(Round your calculations to four decimal places and enter your final to the nearest hundredth of a​ percent, X.XX%)

Operating income	/	Average total assets	=	ROI
	/		=		%

Requirement 2. Calculate the​ company's profit margin ratio. Interpret your results.

Begin by selecting the formula to calculate profit margin​ ratio, and then enter the amounts to calculate the​ company's profit margin ratio. ​(Enter your final to the nearest hundredth of a​ percent, X.XX%)

Operating income	/	Net sales revenue	=	Profit margin ratio
	/		=		%

The company's profit margin ratio tells us that they earn $			of		for every dollar of
	.

Requirement 3. Calculate the​ company's asset turnover ratio. Interpret your results.

Begin by selecting the formula to calculate asset turnover​ ratio, and then enter the amounts to calculate the​ company's asset turnover ratio.

Net sales revenue	/	Average total assets	=	Asset turnover ratio
	/		=

The company's asset turnover ratio explains how efficiently a company uses its					to generate
	. The company is generating $		of		with every $1.00 of
	.

Requirement 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.

​First, select the expanded ROI formula.

Profit margin ratio

x

Asset turnover ratio

=

ROI

Using the expanded formula, the ROI for Safe Money, Inc. is

%.

To determine what is driving a​ company's ROI, management often restates the ROI equation in its expanded form. The ROI calculated with the expanded formula

agrees

agrees

does not agree

with the ROI calculated in Requirement 1.

Requirement 5. Calculate the​ company's RI. Interpret your results.

​First, select the formula to calculate residual income​ (RI).

Operating income

–

(

Target rate of return

x

Average total assets

)

=

RI

The RI for Safe Money, Inc. is $

.

Safe Money comma Inc.Safe Money, Inc.

is

▼

exceeding

not meeting

​management's target rate of return.

Choose from any list or enter any number in the input fields and then continue to the next question.

Answer 1

Safe Money inc.

R1. Return on investment = Operating income / Average total assets

= 300,000/(601,000+399,000)/2 = 300,000/(1000,000/2)

= 300,000/500,000 = 60%

Return on investment is 60 %

R2. Profit margin = Operating income / Net sales revenue

= 300,000/1000,000 = 30%

Profit margin ratio is 30%

R3. Assets turnover ratio = Net sales revenue / Average total assets

= 1000,000/500,000 = 0.5 times

Assets turnover ratio is 0.5 times

R4. Expanded ROI = Profit margin ratio × Assets turnover ratio

= 30% × 0.5 = 15%

Expanded ROI is 15%

R5. Residual income = Operating income - (Target rate of return × Average total assets)

= 300,000 - (20% × 500,000) = 300,000 - 150,000 = 150,000

Residual income is $ 150,000