CMA Study Group

Hi All,

Can someone explain why, in the problem below, we aren't taking the total assets ending balance for year two and averaging it with the ending balance for year one?

At the end of Year 1, a company had average total assets of ¥450 million, average total liabilities of ¥150 million, and net income of ¥135 million. The company's management projects average total assets to increase by ¥50 million in Year 2 due to the planned purchase of a new manufacturing plant. The company will issue ¥30 million in new debt at the beginning of Year 2. No debt was paid down during Year 1. If management projects net income to increase by 25% in Year 2, by approximately how much does the company's return on total assets increase between Year 1 and Year 2?

The answer, for anyone wondering, is 13%, reached by dividing ¥168.75 million by ¥500 million (¥135 million x 1.25)/(¥450 million + ¥50 million). 

Thanks in advance!

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Bradley Bigio
Analyst
Cocoa FL
United States
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Hello,

You don't need to compute the average total assets because the problem already stated that the  ¥450 million is in "average"



------------------------------
Ronilyn Dumanat
Antipolo
Philippines
------------------------------

Original Message:
Sent: 01-20-2022 08:38 PM
From: Bradley Bigio
Subject: Average Total Assets - Please Help

Hi All,

Can someone explain why, in the problem below, we aren't taking the total assets ending balance for year two and averaging it with the ending balance for year one?

At the end of Year 1, a company had average total assets of ¥450 million, average total liabilities of ¥150 million, and net income of ¥135 million. The company's management projects average total assets to increase by ¥50 million in Year 2 due to the planned purchase of a new manufacturing plant. The company will issue ¥30 million in new debt at the beginning of Year 2. No debt was paid down during Year 1. If management projects net income to increase by 25% in Year 2, by approximately how much does the company's return on total assets increase between Year 1 and Year 2?

The answer, for anyone wondering, is 13%, reached by dividing ¥168.75 million by ¥500 million (¥135 million x 1.25)/(¥450 million + ¥50 million).

Thanks in advance!

------------------------------
Bradley Bigio
Analyst
Cocoa FL
United States
------------------------------

I see. That is simple enough to understand. Thank you!

------------------------------
Bradley Bigio
Analyst
Cocoa FL
United States
------------------------------

Original Message:
Sent: 01-20-2022 09:06 PM
From: Ronilyn Dumanat
Subject: Average Total Assets - Please Help

Hello,

You don't need to compute the average total assets because the problem already stated that the  ¥450 million is in "average"



------------------------------
Ronilyn Dumanat
Antipolo
Philippines

Original Message:
Sent: 01-20-2022 08:38 PM
From: Bradley Bigio
Subject: Average Total Assets - Please Help

Hi All,

Can someone explain why, in the problem below, we aren't taking the total assets ending balance for year two and averaging it with the ending balance for year one?

At the end of Year 1, a company had average total assets of ¥450 million, average total liabilities of ¥150 million, and net income of ¥135 million. The company's management projects average total assets to increase by ¥50 million in Year 2 due to the planned purchase of a new manufacturing plant. The company will issue ¥30 million in new debt at the beginning of Year 2. No debt was paid down during Year 1. If management projects net income to increase by 25% in Year 2, by approximately how much does the company's return on total assets increase between Year 1 and Year 2?

The answer, for anyone wondering, is 13%, reached by dividing ¥168.75 million by ¥500 million (¥135 million x 1.25)/(¥450 million + ¥50 million).

Thanks in advance!

------------------------------
Bradley Bigio
Analyst
Cocoa FL
United States
------------------------------