[Anonymous]

Surgent Question –

Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X2. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI’s financial statements and a corresponding list of internal controls that, if properly designed and implemented, could assist MMI in preventing or detecting the errors and fraud.

The unaudited balance sheet for Miller Mailorder, Inc., as of December 31, 20X1, is as follows:

Assets
Cash $2,400,000
Receivables – Net 1,623,800
Inventory 798,200
Prepaids 20,000
Property, Plant, and Equipment – Net 1,200,000
Total Assets $6,042,000

Liabilities and Stockholders’ Equity
Accounts Payable $500,000
Current Portion of LT Debt 800,000
Other Current Liabilities 742,000
Long-Term Debt 1,000,000
Total Liabilities $3,042,000
Stockholders’ Equity
Common Stock $100,000
Additional Paid-in Capital 400,000
Retained Earnings 2,500,000
Total Stockholders’ Equity $3,000,000
Total Liabilities and Stockholders’ Equity $6,042,000

Net income for the current year is $600,000.
Interest expense was $250,000.

Calculate the following ratios using the information above; express to two decimal places.

Debt Ratio (%) =
Quick Ratio (%) =
Rate of Return on Assets (%) =

Simulation time: 00:00:51
Corrected Answers & Further Information

Debt Ratio (%) = 50.35
Quick Ratio (%) = 197.05
Rate of Return on Assets (%) = 14.07

The ratios are calculated as follows:

Debt Ratio = Total liabilities ÷ Total assets
= $3,042,000 ÷ $6,042,000
= 0.50347
= 50.35%

Quick Ratio = Current assets less inventories and prepaid assets ÷ Current liabilities
= (Cash + Receivables) ÷ (Total liabilities – LT Debt)
= ($2,400,000 + $1,623,800) ÷ ($3,042,000 – $1,000,000)
= 1.9705, or 197.05%

Rate of Return
on Assets = (Net income + Interest expense) ÷ Average total assets
= ($600,000 + $250,000) ÷ ($6,042,000)
= 0.1407, or 14.07%

Note: Without prior-year data, use the total asset figure given in the financial information. The return on assets can also be computed without adding back interest expense.

(The reference for this simulation is section 3232 in the Auditing & Attestation Reference Volume.)

 

 

[Anonymous]

Has anyone ever seen this type of calculation for rate of return on assets? I thought it was only NI/Average total assets.

[Author]

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