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Activity 2 Math

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10 views

Activity 2 Math

Uploaded by

Pallasigui Jc
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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BM2313

Name Section Date

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 an 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 plans to award the Intensive Care Division, relying
on its high operating profit. Should the management continue with this decision? Justify your
answer.

Solution:
Operating profit
Return of assets = X100
Average assets

Answer:

1. Booboo Division:

 Operating Profit: ₱24,950


 Average Assets: ₱311,900

ROA = 24,950/311,900

= 0.0799 X 100%

ROA = 7.99% or 8%

2. Splint Division:

 Operating Profit: ₱17,500


 Average Assets: ₱177,950

ROA = 17,500/177,950

= 0.0983 X 100%

ROA = 9.83% OR 10%

3. Intensive Care Division:

 Operating Profit: ₱28,500


 Average Assets: ₱475,000

ROA= 28,500/475,000

= 0.06 X 100%

ROA = 6%

Answer: Intensive Care Division's strong operating profit should not have led the management to
choose to reward them for it. The reason behind this is that, in contrast to the other divisions, the
Intensive Care Division has the lowest return on investment.
2. Charlie’s Construction Company is a growing construction business with a few contracts to build
storefronts in Pasay. Charlie’s balance sheet shows the beginning assets of ₱1,000,000 and an
ending balance of ₱2,000,000. During the current year, Charlie’s company had a net income of
₱20,000,000. Compute the company’s return on assets and interpret the results.

Given:
Income: ₱20,000,000
Beginning Asset: ₱1,000,000
Ending Asset: ₱2,000,000

FIRST FORMULA:
Beginning assets + Ending assets
Average Total Assets =
2

Average Total Assets = 1,000,000 + 2,000,000

= 3,000,000/2

Average Total Assets = 1,500,000

SECOND FORMULA:

Income
Return of asset = X100
Average Total assets

ROA= 20,000,000/1,500,000

= 13.33 X 100%

ROA = 1333%

With a remarkably high return on assets (ROA) of 1333.33%, Charlie's Construction Company is making
a substantial profit in relation to its assets. The corporation generates ₱13.33 in net income for each
peso invested in assets. This could indicate that the business is expanding quickly and is making
effective use of its assets to create revenue.

3. Dave’s Guitar Shop is considering building an additional property 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. Dave’s total assets are P5,000,000,
while his total liabilities are P25,000. Compute Dave’s debt ratio.

Given:
Total assets: ₱ 5,000,000
Total liabilities: ₱ 25,000

Total liabilities
Dept ratio = X100
Total assets

Dept ratio = 25,000/5,000,000

Dept ratio= 0.005 X 100%

Average Dept ratio = 0.5%

Dave’s Guitar Shop has a debt ratio of 0.005. Thus, he has a low leverage of 0.5%.

Rubric for checking:


CRITERIA POINTS
Complete solution/interpretation with the correct answer 5
The last two (2) major steps of the solution are incorrect/
4
correct answers, but no interpretation was given
Half of the solution is correct 3
The first two (2) major steps of the solution are correct 2
The first major step of the solution is correct 1

07 Activity 2 *Property of
STI
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