3. Parton Company began operation on January 1, 2008. The initial investment by the owners was $100,000. The following information was extracted from the company’s records. Net income Dec. 31 Shareholders’ Equity Dec. 31 Inventory Cost of Goods Sold 2008 $51,000 $100,000 $200,000 $1,200,000 2009 49,000 290,000 255,000 1,350,000 2010 51,500 315,000 320,000 1,395,000 2011 50,500 510,000 365,000 1,400,000 Required: a.Compute the return on equity for each year. (Assume a $0 inventory for January 1, 2008). Has the company been effective at managing the capital provided by the equity owners? b.Does the information about inventory and the cost of goods sold indicate any reason for the trend in return on equity? Support your answer with any relevant ratios. 4.The following selected financial information was obtained from the 2010 financial reports of Roper Designs and Turner Industries: Roper Turner Interest expense $100,000 $175,000 Extraordinary gain (net of $320,000 taxes) --- 1,300,000 Net income (including extraordinary item) 610,000 1,675,000 Current liabilities 140,000 25,000 Bonds payable 725,000 0 Mortgage payable 1,490,000 405,000 Common stock 500,000 600,000 Additional paid-in capital 215,000 325,000 Retained earnings 290,000 515,000 Total liabilities and shareholders’ equity $3,360,000 $1,870,000 Required: a.Assume that you are considering purchasing the common stock of one of these companies. (Since you have limited data, assume that the beginning balance sheet amounts equal ending balance sheet amounts for total assets and stockholders’ equity.) Based on this information, which company has a higher return on equity? Would your conclusion be different if the impact of the extraordinary item had not been included in net income? Should the extraordinary item be considered? Why or why not? b.Which company uses leverage more effectively? Does your answer change if you do not consider the impact of the extraordinary item on net income?

3. Parton Company began operation on January 1, 2008. The initial investment by the owners was $100,000. The following information was extracted from the company’s records. Net income ...

3.
Parton Company began operation on January 1, 2008. The initial investment by the owners was $100,000. The following information was extracted from the company’s records.

	Net income	Dec. 31 Shareholders’ Equity	Dec. 31 Inventory	Cost of Goods Sold
2008	$51,000	$100,000	$200,000	$1,200,000
2009	49,000	290,000	255,000	1,350,000
2010	51,500	315,000	320,000	1,395,000
2011	50,500	510,000	365,000	1,400,000

Required:

a.Compute the return on equity for each year. (Assume a $0 inventory for January 1, 2008). Has the company been effective at managing the capital provided by the equity owners?

b.Does the information about inventory and the cost of goods sold indicate any reason for the trend in return on equity? Support your answer with any relevant ratios.

4.The following selected financial information was obtained from the 2010 financial reports of Roper Designs and Turner Industries:

	Roper	Turner
Interest expense	$100,000	$175,000
Extraordinary gain (net of $320,000 taxes)	---	1,300,000
Net income (including extraordinary item)	610,000	1,675,000

Current liabilities	140,000	25,000
Bonds payable	725,000	0
Mortgage payable	1,490,000	405,000
Common stock	500,000	600,000
Additional paid-in capital	215,000	325,000
Retained earnings	290,000	515,000
Total liabilities and shareholders’ equity	$3,360,000	$1,870,000

Required:

a.Assume that you are considering purchasing the common stock of one of these companies. (Since you have limited data, assume that the beginning balance sheet amounts equal ending balance sheet amounts for total assets and stockholders’ equity.) Based on this information, which company has a higher return on equity? Would your conclusion be different if the impact of the extraordinary item had not been included in net income? Should the extraordinary item be considered? Why or why not?

b.Which company uses leverage more effectively? Does your answer change if you do not consider the impact of the extraordinary item on net income?

May 15, 2022

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3. Parton Company began operation on January 1, 2008. The initial investment by the owners was $100,000. The following information was extracted from the company’s records. Net income ...

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