Question

1394 chapter 24 Learning Objective 5 P24-29A Using ROI and RI to evaluate investment center Consider the following condensed financial statements of Forever Free, Inc. The company's target rate of return is 40%. 3. Asset turnover ratio 7.00 2017 FOREVER FREE, INC. Income Statement For the Year Ended December 31, 2018 Net Sales Revenue $ 3,500,000 Cost of Goods Sold 2.200.000 Gross Profit 1,300,000 Operating Expenses 950.000 Operating Income 350,000 Other Income and (Expenses): Interest Expense (27,000) Income Before Income Tax Expense 323,000 Income Tax Expense 113,050 Net Income $ 209.950 $ 52,000 17,800 FOREVER FREE, INC. Comparative Balance Sheet As of December 31, 2018 and 2017 2018 Assets Cash $ 64,000 Accounts Receivable 49,200 Supplies Property, Plant, and Equipment, net 331,800 Patents, net 135,000 Total Assets $ 581,000 1,000 400 229,800 119,000 $ 419,000 СНАРТ Liabilities and Stockholders' Equity Accounts Payable $ 17,000 Short-term Notes Payable 136,000 Long-term Notes Payable 184,000 Coron Stock, no Par 232,000 Khu có at thich 12.000 ats and set outy $ 581,000 $19,000 42,000 114,500 242,000 1,500 $ 419,000 Requirements 1. Calculate the company's ROI Round all of your answers to four decimal places. 2. Calculate the company's profit margin ratio. Interpret your results. 3. Calculate the company's asset turnover ratio. Interpret your results. 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results. 5. Calculate the company's RI. Interpret your results.

Answer 1

1)

ROI = Net Income /Average asset invested

      = 209950 / 500000

      = .4199 or 41.99%

**Average asset invested =[Beginning of asset +Ending of asset] /2

         = [419000+581000]/2

        = 1000000/2

         = 500000

2)Profit margin ratio =Net income /Net sales revenue

               =209950 / 3500000

                = .059986 or 5.9986%

It means of the sales revenue (100%) ,5.9986% is left as net income after meeting cost of sales and all operating expense .

3)Asset turnover ratio = Net sales / Average asset

                       = 3500000/500000

                        = 7

Asset turnover ratio measures the efficiency of asset to generate sales revenue .The ratio indicates for every dollar asset invested , $ 7 is generate as revenue

4)ROI = Profit margin ratio * Asset turnover ratio

                   = 5.9986 *7

                   = 41.9902%    (approx to 41.99%)

5)Residual income = Net income -[Average asset invested * Target rate of return]

                = 209950 - [ 500000*40%]

               = 209950 - 200000

              = 9950