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Chapter 2: Q7DQ_c (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. (LO3-5)

c. Fixed asset turnover

Short Answer

Expert verified

The inflation may increase the fixed assets turnover ratio.

Step by step solution

01

Fixed assets turnover ratios formula:

Fixedassetsturnoverratio=TotalsalesTotalfixedassets

02

Fixed assets turnover ratio:

Inflation may increase the fixed assets turnover ratio of the company because inflation may boost the company's income. However, it does not affect the value of the company's fixed assets.

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Most popular questions from this chapter

Explain how depreciation generates actual cash flows for the company.

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

Botox Facial Care had earnings after taxes of \(370,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was \)31.50. In 20X2, earnings after taxes increased to \(436,000 with the same 200,000 shares outstanding. The stock price was \)42.00

a. Compute earnings per share and the P/E ratio for 20X1. The P/E ratio

equals the stock price divided by earnings per share.

b. Compute earnings per share and the P/E ratio for 20X2.

c. Give a general explanation of why the P/E ratio changed.

Vriend Software Inc.鈥檚 book value per share is \(15.20. If earnings per share is\)1.88 and the firm鈥檚 stock trades in the stock market at 3.5 times book value pershare, what will the P/E ratio be? (Round to the nearest whole number.)

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

The total assets for this company equal \(80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.

d. Total assets turnover ratio.

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

*equal income before interest and taxes
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