1) What does the change from 2009 to 2010 (decreasing) in the percent return on
ID: 2489862 • Letter: 1
Question
1) What does the change from 2009 to 2010 (decreasing) in the percent return on assets mean for the company?
2) The CFO wants a projection for 2011 showing a net profit margin of 25%. What changes would have to happen for the net profit to increase?
3) Describe at least two things that could happen within this company that would make it necessary for the controller to dig into the numbers and provide a write up to management. (for instance, the controller might notice that inventory has shrunk by over 50% what might he look for in the numbers and what ratios might he use to check things before alerting management)
Explanation / Answer
Decrease in return on asset means that overall income of the company has decreased. Expenses might have increased due to which income has decreased. The asset base may have increased but the income has not increased in the same proportion causing the decrease in the return on assets.
Overall expenses should be controlled in order to increase the net margin. The operating expense has to be minimized so to increase the operating profit. The utilization of the assets plays an important role in the overall profitability, Managers has to make sure that the company’s assets are utilizied properly.
The controller should look into the inventory turnover ratio, turnover ratios shows how many times inventory or the assets of the company turns up. The higher the turnover the higher is the amount of sales.
Proper inventory level has to be maintained in order to improve the operating efficiency of the company.
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