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Chapter 2: Q7DQ_a (page 75)

Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions.

a. Return on investment

Short Answer

Expert verified

In the case of inflation in an economy, the return on investment increases.

Step by step solution

01

Formula to compute Return on investments:

ReturnonInvestment=NetincomeaftertaxTotalassets

02

Return on investments:

The return on investment is obtained by dividing the net income after tax by the total assets.Inflation may increase the company's net income and may not affect the company's total assets. Therefore, it may lead to an increase in the return on investment.

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Most popular questions from this chapter

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.

c. Now assume income increased by 10 percent each year. What effect would this have on your preceding answers? (A comment is all that is necessary.)

Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions.

b. Inventory turnover

Explain how the Du Pont system of analysis breaks down return on assets. Also explain how it breaks down return on stockholders鈥� equity

Quantum Technology had \(669,000 of retained earnings on December 31, 20X2. The company paid common dividends of \)35,500 in 20X2 and had retained earnings of $576,000 on December 31, 20X1. How much did Quantum Technology earn during 20X2, and what would earnings per share be if 47,400 shares of common stock were outstanding?

Assume the following data for Cable Corporation and Multi-Media Inc.

Capable corporation

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