Question

The following data were taken from the financial statements of Gates Inc. for the current fiscal year. Property, plant, and equipment (net) $1,414,800 Liabilities: Current liabilities $156,000 Note payable, 6%, due in 15 years 786,000 Total liabilities $942,000 Stockholders' equity: Preferred $4 stock, $100 par (no change during year) $942,000 Common stock, $10 par (no change during year) 942,000 Retained earnings: Balance, beginning of year $1,004,000 Net income 357,000 $1,361,000 Preferred dividends $37,680 Common dividends 67,320 105,000 Balance, end of year 1,256,000 Total stockholders' equity $3,140,000 Sales $23,482,000 Interest expense $47,160 Assuming that total assets were $3,878,000 at the beginning of the current fiscal year, determine the following. When required, round to one decimal place. a. Ratio of fixed assets to long-term liabilities b. Ratio of liabilities to stockholders' equity c. Asset turnover d. Return on total assets % e. Return on stockholders’ equity % f. Return on common stockholders' equity

Answer 1

a. Ratio of fixed assets to long-term liabilities = fixed assets / long-term liabilities
=  $1,414,800 / $786,000 = 1.80

b. Ratio of liabilities to stockholders' equity = Total liabilities / total stockholders equity
= $942,000 / $3,140,000 = 0.30

c. Asset turnover = Net Sales / Average total asset (excluding investment)
= $23,482,000 /{($942,000+$3,140,000+$3,878,000) / 2} = 5.90

d. Return on total assets = (Net Income + Interest) / Average total asset
= ($357,000 + $47,160) / {($942,000+$3,140,000+$3,878,000) / 2} = 10.15%

e. Return on stockholders’ equity = Net Income / Average Stockholders equity
= $357,000 / [($3,140,000 + $3,140,000 - 357,000) / 2] = 12.05%

f. Return on common stockholders' equity = (Net income - preferred dividend) / Average common stockholders equity
= ($357,000 - $37,680) / [(942,000+942,000 +$1,004,000+ $1,004,000 + $357,000 - $37,680 - 67320) / 2] = 15.41%