12BP All State Trucking Co. has the f... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: 12BP (page 79)

All State Trucking Co. has the following ratios compared to its industry for last year:
Allstate trucking
Industry
Return on sales
3%
8%
Return on assets
15%
10%
Explain why the return-on-assets ratio is so much more favorable than thereturn-on-sales ratio compared to the industry. No numbers are necessary;a one-
sentence answer is all that is required.

Short Answer

Expert verified

All-State Trucking Co. has a higher asset turnover ratio than the industry.

Step by step solution

Calculating the Asset Turnover Ratio with Return on Assets and Return on Sales

The asset turnover ratio is the ratio between a company's sales and total assets (Net sales/Total Assets). It indicates how well the company is converting its resources into revenue.

By dividing Return on Sales by Return on Assets, we have:

Allstate Trucking Co.'s Asset Turnover Ratio

Industry's Asset Turnover Ratio

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Lancaster corporation
Sales	\(246,000
Cost of goods sold	122,000
Gross profit	\)124,000
Fixed charges (other than interest)	27,500
Income before interest and taxes	\(96,500
Interest	21,800
Income before taxes	\)74,700
Taxes (35%)	26,145
Income after taxes	$48,555

JONES CORPORATION
Current assets		Liabilities
Cash	\(20,000	Accounts payable	\)100,000
Accounts receivable	80,000	Bonds payable (long term)	80,000
Inventory	50,000
Long Term Assets		Stockholder鈥檚 Equity
Fixeed assets	\(500,000	Common Stock	\)150,000
Less: Accumulated Depreciation	(150,000)	Paid in capital	70,000
Net fixed assets*	350,000	Retained earnings	100,000
Total assets	\(500,000	Total Liab. And equity	\)500,000

JONES CORPORATION
Sales (on credit)	\(1,250,000
Cost of goods sold	750,000
Gross profit	\)500,000
Selling and administrative expenses	257,000
Less: depreciation expenses	50,000
Operating profits	\(193,000
Interest expenses	8,000
Earning before taxes	\)185,000
Tax expenses	92,500
Net income	\(92,500

SMITH CORPORATION
Current assets		Liabilities
Cash	\(35,000	Accounts payable	\)75,000
Marketable securities	7,500	Bonds payable (long term)	210,000
Accounts receivable	70,000
Inventory	75,000
Long term assets		Stockholder鈥檚 equity
Fixed assets	\(500,000	Common stock	\)75,000
Less: accumulated depreciation	250,000	Paid in capital	30,000
Net fixed assets*	250,000	Retained earnings	47,500
Total assets	\(437,500	Total liab. And equity	\)437,500

SMITH CORPORATION
Sales (on credit)	\(1,000,000
Cost of goods sold	600,000
Gross profit	\)400,000
Selling and administrative expenses	224,000
Less: depreciation expenses	50,000
Operating profits	\(126,000
Interest expenses	21,000
Earning before taxes	\)105,000
Tax expenses	52,500
Net income	\(52,500

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Short Answer

Step by step solution

Calculating the Asset Turnover Ratio with Return on Assets and Return on Sales

Allstate Trucking Co.'s Asset Turnover Ratio

Industry's Asset Turnover Ratio

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	Allstate trucking	Industry
Return on sales	3%	8%
Return on assets	15%	10%