Scribd Logo
Upload

Welcome to Scribd!

  • 1K views

    07 - Activity Sample Problems and Financial Ratios

    Uploaded by

    Lorielyn Arnaiz Caringal
    The document provides 3 sample problems on calculating and interpreting financial ratios. The first problem asks about evaluating divisions based on return on investment (ROI) rather than just operating profit. The second calculates return on assets (ROA) of 666.7% for a construction company, indicating high earnings on low investment. The third calculates a debt ratio of 5% for a guitar shop, showing low liabilities and financial health to take on a new loan.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    07 - Activity Sample Problems and Financial Ratios

    Uploaded by

    Lorielyn Arnaiz Caringal
    1K views2 pages
    The document provides 3 sample problems on calculating and interpreting financial ratios. The first problem asks about evaluating divisions based on return on investment (ROI) rather than just operating profit. The second calculates return on assets (ROA) of 666.7% for a construction company, indicating high earnings on low investment. The third calculates a debt ratio of 5% for a guitar shop, showing low liabilities and financial health to take on a new loan.

    Original Title

    07_Activity Sample Problems and Financial Ratios

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document provides 3 sample problems on calculating and interpreting financial ratios. The first problem asks about evaluating divisions based on return on investment (ROI) rather than just operating profit. The second calculates return on assets (ROA) of 666.7% for a construction company, indicating high earnings on low investment. The third calculates a debt ratio of 5% for a guitar shop, showing low liabilities and financial health to take on a new loan.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    1K views2 pages

    07 - Activity Sample Problems and Financial Ratios

    Uploaded by

    Lorielyn Arnaiz Caringal
    The document provides 3 sample problems on calculating and interpreting financial ratios. The first problem asks about evaluating divisions based on return on investment (ROI) rather than just operating profit. The second calculates return on assets (ROA) of 666.7% for a construction company, indicating high earnings on low investment. The third calculates a debt ratio of 5% for a guitar shop, showing low liabilities and financial health to take on a new loan.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    SAMPLE PROBLEMS ON FINANCIAL RATIOS

    1. The management of International Heal Medical Company is evaluating the performance of its
    three (3) divisions. The Booboo Division had operating profit of ₱24,950 and on average used
    assets with a book value of ₱311,900. The Splint Division had an operating profit of ₱17,500 and
    used average assets of
    ₱177,950. The Intensive Care Division had an operating profit of ₱28,500 and average assets of
    ₱475,000. The company is planning to award the Intensive Care Division relying on its high
    operating profit. Should the management continue with this decision? Justify your answer.

     No, if the company continue the decision, it seems like the management depends only on the
    division which only produced higher operating profit, it means they are just looking for the division
    that produced higher income from its daily activities. The management of International Heal Medical
    Company aim to determine or evaluate their performance, they must rely on the computed ROI of
    the three division (calculate ROI as operating profit divided by average assets) since ROI is a good
    way to compare each of them. If the company calculated the ROI of each division, they can come
    up with the decision that The Splint Division performs the best with an ROI of 9% rather than the
    Intensive care division and Booboo Division which got an ROI of less than 9%. Although the
    Intensive care division has the highest operating profit, The Splint Division appears to be
    outperforming among the two other division based on this measure. Calculating ROI doesn’t only
    focus at the profit, it also includes measuring the use of assets to determine the profitability of a
    company.

    2. Charlie’s Construction Company is a growing construction business that has a few contracts
    to build storefronts in Pasay. Charlie’s balance sheet shows beginning assets of ₱1,000,000
    and an ending balance of ₱2,000,000 of assets. During the current year, Charlie’s company
    had a net income of
    ₱20,000,000. Compute for the company’s return on assets and interpret the results.
    Return on Assets = 6.667 or 666.7%

    Since the result of ROA has over 5% it means that Charlie’s construction company is earning
    more money on less investment.

    3. Dave’s Guitar Shop is thinking about building an addition onto the back of its existing building
    for more storage. Dave consults with his banker about applying for a new loan. The bank asks
    for Dave’s balance to examine his overall debt levels. The banker discovers that Dave has
    total assets of ₱5,000,000 and total liabilities of ₱25,000. Compute for Dave’s debt ratio.

    Debt Ratio = 0.005 or 5%

    It means the total liabilities are lower than assets which mean that the entity is financially healthy, it is a

    good sign the entity could pay the bank loan.

    Rubric for checking:


    CRITERIA POINTS
    Complete solution with correct answer 5
    Last two (2) major steps of the solution are incorrect 4
    Half of the solution is correct 3
    First two (2) major steps of the solution are correct 2
    First major step of the solution is correct 1

    You might also like