Capstone case-Analysis of ROI,ROE,liqudity & Materialty
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I am a bit weak understanding the Capstone case. I read through the solution that was posted online already but I am not 100% clear. For example, in question b) why is advertising disclosed separately even though carefully controlled? Or in part E how would you know the equity position did not change from year to year. For part H assessing the company's overall liquidity and for part I why the measures are not meaningful (why in this case more than others if the ROI and ROE measures company performance)?
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Solution Summary
The solution contains answers for 1. Reason for showing an expense separately in the income statement on the basis of materiality 2.Evaluation of stockholders' equity 3. Evaluation of liquidity by computing working capital and 4. Evaluation of Return on investment and Return on equity
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Explanation for b) why advertising has been separately mentioned even though it is carefully controlled?
The reason is since the advertising constitutes nearly 33% of the total cost .i.e., 28/(28+59).Therefore, it must be shown separately in the income statement.
Explanation to part E
Here, equity comprises of paid up capital and retained earnings. Retained earnings consist of the retained earnings in the beginning of the year + net profit earned during the year -dividend distributed during the year. In the question, last year's owners' equity is 50 and it is mentioned that there is no change in the paid up capital which means THERE IS NO FRESH INFLOW OF CAPITAL FROM THE OWNERS. ONLY IF THERE IS ADDITIONAL CPAITAL PUT INTO BUSINESS, THE PAID UP CAPITAL WILL CHANGE. Therefore, in this 50, owner's capital is 20 and the remaining 30 is the ...
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