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Discrepancies between income statement and balance sheet

S&J Plumbing, Inc.'s 2010 income statement shows a net profit before tax of $468, whereas the balance sheet that the company's equity for the fiscal year-end 2010 is $1,746.

a) Calculate the company's return on equity and whether the managers are providing a good return on the capital provided by the company's shareholders.
b) Diagram the operating cycle of a service company.

In addition:
c) When analyzing statements, what external factors that affect business must be considered?
d) What are the similarities between a firm's capital budgeting decisions and individual investment decisions.

Solution Preview

ROE is 468/1746 = 0.268 = 27%

The managers of S&J Plumbing are indeed providing a good return for their shareholders because anything between 15% - 20% is favorable.

Operating Cycle (Please see the attached document for an illustration)
1. Perform services
2. Accounts Receivable
3. Get cash

External factors that affect a firm's profitability may be issues such as: inflation, interest rates, exchange rates, and government policy. The firm's internal environment includes items that can be affected by management, such as ...

Solution Summary

This solution provides a detailed explanation and solution to the following questions:
a) Calculate the company's return on equity and whether the managers are providing a good return on the capital provided by the company's shareholders.
b) Diagram the operating cycle of a service company.
An attachment is also provided with all diagrams needed for clear understanding of this problem.

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