Question

1. Please elaborate what will happen to Net Earnings to Sales and Net Earnings to Total Book Assets when you observe these trends.  (a) and (b) are separate unrelated circumstances.  

1. Sales increased by a total of 30% in the prior three years, while Days of Sales in Inventories increased also by 30% in each of these three years.  Costs of Goods Sold to Sales remained constant.  
2. Gross property, plant, and equipment increased by a total of 30% during the prior three years.  Operating and administrative expense increased relative to sales by 30% in the prior three years.  Sales remained constant.  Costs of goods sold to sales remained constant.  

Answer 1

A. I. Net earning to sales will be INCREASING because the cost of goods sold has remain constant and sales has increased.when the cost of goods sold is remaining at similar level, So, it will mean that the overall profits will be going higher and the proportion of net earning to sales will be increasing.

II. Net earning to total book assets will be DECREASING because the asset has also increased as the inventory has increased by almost 30%

B. I. Net earning to sales ratio will be DECREASING because it can be seen that the operating and administrative expenses has gone highrrand it would be resulting to a lower profits

II. Net earning to total book asset will be going down because the total assets has increased as well as the net earning has decreased.

Hence the net earning to total book asset will be DECREASING.