Question

1.

Measures of liquidity, Solvency, and Profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall common stock was $ 56 on December 31, 20Y2.

Marshall Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 20Y2 and 20Y1
			20Y2		20Y1
Retained earnings, January 1			$4,770,100		$4,018,100
Net income			1,050,800		823,000
Total			$5,820,900		$4,841,100
Dividends:
	On preferred stock		$14,000		$14,000
	On common stock		57,000		57,000
		Total dividends	$71,000		$71,000
Retained earnings, December 31			$5,749,900		$4,770,100

Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$5,861,535		$5,400,550
Cost of goods sold	2,180,510		2,006,070
Gross profit	$3,681,025		$3,394,480
Selling expenses	$1,178,190		$1,459,740
Administrative expenses	1,003,645		857,310
Total operating expenses	$2,181,835		$2,317,050
Income from operations	$1,499,190		$1,077,430
Other revenue	78,910		68,770
	$1,578,100		$1,146,200
Other expense (interest)	384,000		211,200
Income before income tax	$1,194,100		$935,000
Income tax expense	143,300		112,000
Net income	$1,050,800		$823,000

Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
			20Y2		20Y1
Assets
Current assets
	Cash		$1,055,440		$1,033,180
	Marketable securities		1,597,420		1,712,120
	Accounts receivable (net)		1,138,800		1,073,100
	Inventories		846,800		657,000
	Prepaid expenses		199,684		206,640
		Total current assets	$4,838,144		$4,682,040
Long-term investments			4,083,676		1,985,569
Property, plant, and equipment (net)			5,280,000		4,752,000
Total assets			$14,201,820		$11,419,609
Liabilities
Current liabilities			$1,511,920		$1,869,509
Long-term liabilities:
	Mortgage note payable, 8%		$2,160,000		$0
	Bonds payable, 8%		2,640,000		2,640,000
		Total long-term liabilities	$4,800,000		$2,640,000
Total liabilities			$6,311,920		$4,509,509
Stockholders' Equity
Preferred $0.70 stock, $50 par			$1,000,000		$1,000,000
Common stock, $10 par			1,140,000		1,140,000
Retained earnings			5,749,900		4,770,100
Total stockholders' equity			$7,889,900		$6,910,100
Total liabilities and stockholders' equity			$14,201,820		$11,419,609

Required:

Determine the following measures for 20Y2, rounding to one decimal place, except for dollar amounts, which should be rounded to the nearest cent. Use the rounded answer of the requirement for subsequent requirement, if required. Assume 365 days a year.

1. Working capital	$
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables		days
6. Inventory turnover
7. Number of days' sales in inventory		days
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders' equity
10. Times interest earned
11. Asset turnover
12. Return on total assets		%
13. Return on stockholders’ equity		%
14. Return on common stockholders’ equity		%
15. Earnings per share on common stock	$
16. Price-earnings ratio
17. Dividends per share of common stock	$
18. Dividend yield		%

2.

Six Measures of Solvency or Profitability

The following data were taken from the financial statements of Gates Inc. for the current fiscal year.

Property, plant, and equipment (net)						$1,281,600
Liabilities:
	Current liabilities			$213,000
	Note payable, 6%, due in 15 years			1,068,000
	Total liabilities					$1,281,000
Stockholders' equity:
	Preferred $4 stock, $100 par (no change during year)					$960,750
	Common stock, $10 par (no change during year)					960,750
Retained earnings:
	Balance, beginning of year	$1,024,000
	Net income	472,000		$1,496,000
	Preferred dividends	$38,430
	Common dividends	176,570		215,000
	Balance, end of year					1,281,000
Total stockholders' equity						$3,202,500
Sales						$28,850,250
Interest expense						$64,080

Assuming that total assets were $4,259,000 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

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Marshall
Statement of Earnings	20Y2	20Y1
Sales	5,861,535.00	5,400,550.00
Cost of goods sold	2,180,510.00	2,006,070.00
Gross Profit	3,681,025.00	3,394,480.00
Selling expenses	1,178,190.00	1,459,740.00
Administrative expenses	1,003,645.00	857,310.00
Total operating expenses	2,181,835.00	2,317,050.00
Income from operations	1,499,190.00	1,077,430.00
Other revenue	78,910.00	68,770.00
	1,578,100.00	1,146,200.00
Other expense (interest)	384,000.00	211,200.00
Income before income tax	1,194,100.00	935,000.00
Income tax expense	143,300.00	112,000.00
Net Income	1,050,800.00	823,000.00
Preferred stock Dividend	14,000.00	14,000.00
Net Income - available for common stockholder	1,036,800.00	809,000.00
Statement of Financial Position
Assets	20Y2	20Y1
Cash	1,055,440.00	1,033,180.00
Marketable securities	1,597,420.00	1,712,120.00
Accounts Receivable (Net)	1,138,800.00	1,073,100.00
Inventory	846,800.00	657,000.00
Prepaid expenses	199,684.00	206,640.00
Total Current Assets	4,838,144.00	4,682,040.00
Long-term investments	4,083,676.00	1,985,569.00
Property Assets (Net)	5,280,000.00	4,752,000.00
Total Assets	14,201,820.00	11,419,609.00
Liabilities
Current Liabilities	1,511,920.00	1,869,509.00
Long Term- Liabilities
Mortgage note payable, 8%	2,160,000.00	-
Bonds Payable, 8%	2,640,000.00	2,640,000.00
Total Long Term- Liabilities	4,800,000.00	2,640,000.00
Total Liabilities	6,311,920.00	4,509,509.00
Stockholders' Equity
Preferred $0.70 stock, $50 par	1,000,000.00	1,000,000.00
Common Stock, $ 10 par	1,140,000.00	1,140,000.00
Retained Earnings	5,749,900.00	4,770,100.00
Total Stockholders' Equity	7,889,900.00	6,910,100.00
Total Liabilities & Stockholders' Equity	14,201,820.00	11,419,609.00

Total Current Assets	4,838,144.00
Less: Inventory	846,800.00
Prepaid expenses	199,684.00
Quick Assets	3,791,660.00

	20Y2	20Y1
Accounts Receivable (Net)	1,138,800.00	1,073,100.00
Average Accounts Receivable (Net)	1,105,950.00
Inventory	846,800.00	657,000.00
Average Inventory	751,900.00
Total Assets	14,201,820.00	11,419,609.00
Average Total Assets	12,810,714.50

Common Stock, $ 10 par	1,140,000.00
Retained Earnings	5,749,900.00
Total Common Stockholders' Equity	6,889,900.00
Common Stock, $ 10 par	1,140,000.00
Par Value	10.00
Number of shares in Common Stock	114,000.00
Market price per share	56.00
Common Stock dividends	57,000.00

Ans 1- Working capital	20Y2
Current Assets- Current Liabilities	3,326,224.00
Ans 2- Current Ratio
Current Assets/Current Liabilities	3.2
Ans 3- Acid Test Ratio
Quick Assets/Quick Liabilities	2.5
Ans 4- Accounts Receivables Turnover
Sales Revenue/Average Accounts Receivable	5.3
Ans 5- Number of days' sales in receivables
365/ Accounts Receivables Turnover	68.9
Ans 6- Inventory Turnover
Cost of goods sold/Average Inventory	2.9
Ans 7- Number of days' sales in inventory
365/ Inventory Turnover	125.9
Ans 8- Ratio of fixed assets to long-term liabilities
Property Assets (Net)/ long-term liabilities	1.1
Ans 9- Ratio of liabilities to stockholders' equity
Total Liabilities/ Stockholders' equity	0.8
Ans 10- Times interest earned
(Income from operations + Other revenue)/ Interest	4.1
Ans 11- Asset turnover
Sales Revenue/Average Total Assets	0.5
Ans 12- Return on Total Assets
Net Income /Average Total Assets	8.2%
Ans 13- Return on stockholders’ equity
Net Income / Total stockholders’ equity	13.3%
Ans 14- Return on Common stockholders’ equity
Net Income - available for common stockholder / Total Common stockholders’ equity	15.0%
Ans 15- Earnings Per share on Common Stock
Net Income - available for common stockholder /Number of shares in Common Stock	9.1
Ans 16- Price Earnings Ratio
Market Price/ Earnings Per share on Common Stock	6.2
Ans 17- Dividend Per share on Common Stock
Common Dividend/ Number of shares in Common Stock	0.5
Ans 18- Dividend Yield
Dividend Per share on Common Stock/ Market Price	0.9%

Gates Inc.
Statement of Earnings	Amount $
Sales	28,850,250.00
Net Income	472,000.00
Preferred stock Dividend	38,430.00
Net Income - available for common stockholder	433,570.00
Statement of Financial Position
Assets	Amount $
Property, plant, and equipment	1,281,600.00
Total Assets	4,483,500.00
Liabilities
Current Liabilities	213,000.00
Long Term- Liabilities
Notes payable, 6%	1,068,000.00
Total Long Term- Liabilities	1,068,000.00
Total Liabilities	1,281,000.00
Stockholders' Equity
Preferred $4 stock, $100 par	960,750.00
Common Stock, $ 10 par	960,750.00
Retained Earnings	1,281,000.00
Total Stockholders' Equity	3,202,500.00
Total Liabilities & Stockholders' Equity	4,483,500.00

	Current Year	Preceding Year
Total Assets	4,483,500.00	4,259,000.00
Average Total Assets	4,371,250.00

Common Stock, $ 10 par	960,750.00
Retained Earnings	1,281,000.00
Total Common Stockholders' Equity	2,241,750.00

Ans a- Ratio of fixed assets to long-term liabilities
Property Assets (Net)/ long-term liabilities	1.2
Ans b- Ratio of liabilities to stockholders' equity
Total Liabilities/ Stockholders' equity	0.4
Ans c- Asset turnover
Sales Revenue/Average Total Assets	6.6
Ans d- Return on Total Assets
Net Income /Average Total Assets	10.8%
Ans e- Return on stockholders’ equity
Net Income / Total stockholders’ equity	14.7%
Ans f- Return on Common stockholders’ equity
Net Income - available for common stockholder / Total Common stockholders’ equity	19.3%