26BP_b In January 2007, the Status Quo ... [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: 26BP_b (page 83)

In January 2007, the Status Quo Company was formed. Total assets were $544,000, of which $306,000 consisted of depreciable fixed assets. Status
Quo uses straight-line depreciation of $30,600 per year, and in 2007 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been $29,000 per year each of the last 10 years. Other assets have not changed since 2007.
b. To what do you attribute the phenomenon shown in part a?

Short Answer

Expert verified

The increasing return on assets over time is solely due to annual depreciation charges. This is because the annual depreciation charges reduce the amount of investment and the net income of the company is stable.

Step by step solution

Return on assets

The return on total asset is computed by dividing the net income by the total assets of the company.

Return on assets for the year ending 2007, 2009, 2012, 2014, and 2016

The increase in annual depreciation is causing the decrease in the total assets of the company annually. As a result, the return on assets is increasing from 2007 through 2016.

Year	Net Income (a)	Total assets (b)	Return on assets (a/b)
2007	$29,000	$513,400	5.65%
2009	29,000	452,200	6.41%
2012	29,000	360,400	8.05%
2014	29,000	299,200	9.69%
2016	$29,000	$238,000	12.18%

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Sales	1,360,000
Shares outstanding	104,000
Cost of goods sold	700,000
Interest expenses	34,000
Selling and administration expenses	49,000
Depreciation expenses	23,000
Preferred stock dividend	86,000
Taxes	100,000

Times mirror and glass company
Sales	\)126,000
Less: Cost of goods sold	93,000
Gross profit	\(33,000
Less: selling and administrative expenses	11,000
Lease Expenses	4,000
Operating profit*	\)18,000
Less: Interest expenses	3,000
Earning before taxes	\(15,000
Less: Taxes (30%)	4,500
Earning after taxes	\)10,500

	20X1	20X2
Sales	\(3,230,000	\)3,370,000
Cost of goods sold	2,130,000	2,850,000
Gross profits	\(1,100,000	\)520,000
Selling and administrative expenses	298,000	227,000
Operating profits	\(802,000	\)293,000
Interest expense	47,200	51,600
Income before taxes	\(754,800	\)241,400
Taxes (35%)	264,180	84,490
Income after tax	\(490,620	\)156,910

Accumulated depreciation	\(309,000
Retained earnings	187,000
Cash	14,000
Bonds payable	136,000
Accounts receivable	54,000
Plant and equipment 鈥� original cost	775,000
Accounts payable	35,000
Allowance for bad debts	9,000
Common stock, \)1 par, 100,000 share outstanding	100,000
Inventory	70,000
Preferred stock, $59 par, 1,000 share outstanding	59,000
Marketable securities	24,000
Investments	20,000
Notes payable	34,000
Capital paid in excess of par (common stock)	88,000

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Short Answer

Step by step solution

Return on assets

Return on assets for the year ending 2007, 2009, 2012, 2014, and 2016

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