Ways To Increase Return On Assets Essay Example | Topics and Well Written Essays - 2000 words

Ways To Increase Return On Assets - Essay Example Since both sets of figures show similarity in the total expenses at  £15,400 each, although Set B fails to present the break down of the expenses, then using the said expenses as criterion could not be deemed to indicate a material difference for purposes of inferring which of the two would or would not show a true and fair value. It is, therefore, the matter of the closing stock that will settle the issue of which set does or does not present a true and fair view since it is in the value of the closing where the two sets of figures materially differ. By taking the difference of  £14,000 and  £10,000, one will get a difference of  £4,000 which represents about 40% and which could be now considered by auditors as material misstatement in the financial statement. As to why it affects materially the financial statements will be seen in the income statement and the balance sheet. The income statement is affected because closing stock or inventory takes the nature of revenues in t he income statement as will be explained later. The balance sheet is also affected because the closing stock is part of the current assets and total assets which are parts the computation of liquidity using current ratio and the profitability using the return on assets. Since it affects the net income, the other ratios where net income is used will also be affected.  As to how the material misstatement will affect the profitability ratios may be illustrated as follows: First, the closing stock is important in the computation of gross profit ratio (GPR) which is computed by dividing gross profit by the total sales. It must be noted that the closing stock affects the value of the cost of sales to be deducted from total sales to arrive at the gross profit.