Problem 181A Comparative statement data for Farris Company a

Problem 18-1A Comparative statement data for Farris Company and Ratzlaff Company, two competitors, appear below. All balance sheet data are as of December 31, 2017, and December 31, 2016 Farris Company Ratzlaff Company 2016 2016 2017 $1,560,000 1,070,000 304,200 $339,800 241,300 78,500 2,700 7,000 Net sales Cost of goods sold Operating expenses Interest expense Income tax expense Current assets Plant assets (net) Current liabilities Long-term liabilities Common stock, $10 par Retained earnings 8,800 55,000 323,500 $310,300 82,300 $79,200 522,000 497,600 138,900 125,400 74,400 36,600 29,400 89,600 29,000 25,200 497,500 497,500 120,000 120,000 175,000 146,400 35,600 30,000 64,800 108,200

Solution

Return on Asset :

ROA = Net Income/Total Assets

Net income of Farris for 2017 = $122,000

Average Total Assets for FArris =[ Current Assets(2017)+Fixed Assets(2017)+Current Assets (2016)+Fixed Assets(2016)]/2 = ($323,500+$522,000+$310,300+$497,600)/2 = $826,700

Farris ROA = $122,000/$826,700 = 0.1475 or 14.75%

Ratzlaff\'s ROA:

Average Total Assets for Ratzlaff =[ Current Assets(2017)+Fixed Assets(2017)+Current Assets (2016)+Fixed Assets(2016)]/2 = ($82,300+$138,900+$79,200+$125,400)/2 = $212,900

Ratzlaff ROA = $10,300/$212,900 = 0.04838 = 4.84%

Return on Equity:

ROE of Farris = Net Income / Total common Equity

Net Income = $122,000

Average Common Equity = [ Common stock(2017)+Retained Earnings(2017)+Common stock (2016)+Retained Earnings(2016)]/2

Average Common stock of Farris = ($497,500+$175,000+$497,500+$146,400)/2 = $658,200

ROE of FARRIS = $122,000/$658,200 = 0.185354 = 18.54%

ROE of Ratzlaff:

Net Income = $10,300

Average Common Equity = [ Common stock(2017)+Retained Earnings(2017)+Common stock (2016)+Retained Earnings(2016)]/2

Average Common stock of Farris = ($120,000+$35,600+$120,000+$30,000)/2 = $152,800

ROE of Ratzlaff: = $10,300/$152,800 = 0.067408 or 6.74%

Condensed Income Statement
For the Year Ended December 31, 2017
	Farris Company	Ratzlaff Company
Particulars	Dollars ($)	Percentage	Dollars	Percentage
Net Sales	15,60,000	100%	3,39,800	100%
Cost of Goods Sold	10,70,000	68.59%	2,41,300	71.01%
Gross Profit	4,90,000	31.41%	98,500	28.99%
Operating Expense	3,04,200	19.50%	78,500	23.10%
Income from Operations	1,85,800	11.91%	20,000	5.89%
Other Expenses and Losses
Interest Expense	8,800	0.56%	2,700	0.79%
Income Before Tax (EBT)	1,77,000	11.35%	17,300	5.09%
Income Tax Expense	55,000	3.53%	7,000	2.06%
Net Income	1,22,000	7.82%	10,300	3.03%