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solution

Applying the Accounting Equation and Computing Financing Proportions

Following is fiscal 2018 information for three companies that report under IFRS.

Required

a. Apply the accounting equation to compute the missing financial amounts (a), (b), and (c).

In millions Assets = Liabilities + Equity
OMV Group (Austria, Euros) 36,961 21,619 (c)
Ericsson (Sweden, SEK) 268,761 (b) 87,770
BAE Systems (UK, pounds) (a) 24,746 5,618

b. Which of the companies has the highest proportion of financing from owners?
Answer: BAE Systems, Ericsson, or OMV Group

c. Which of the companies has the highest proportion of financing from nonowners?
Answe: rBAE Systems, Ericsson, or OMV Group

Computing and Interpreting Financial Statement Ratios

Following are selected ratios of Norfolk Southern for 2018 and 2017.

Return on Assets (ROA) Component 2018 2017
Profitability (Net income/Sales) 23.3% 51.2%
Productivity (Sales/Average assets) 0.318 0.299

a. Was the company profitable in 2018?
Answer: Yes

b. Was the company more profitable in 2018 or 2017?
Answer: 2017

c. Is the change in productivity a positive or negative development?
Answer: Positive

d. Compute the company’s ROA for 2018 and for 2017.

Note: Round answers to one decimal places (example: 10.4%).

ROA
2018 7.4%
2017 15.3%

From the information provided, which of the following best explains the change in ROA during
2018?
Answer

1. The company’s profitability weakened considerably.

2. The company’s profitability weakened considerably and its productivity fell.

3. The company had markedly more assets in 2018.

4. The company had a marked drop in revenue in 2018.

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