Question

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)						$1,407,600
Liabilities:
	Current liabilities			$157,000
	Note payable, 6%, due in 15 years			782,000
	Total liabilities					$939,000
Stockholders' equity:
	Preferred $2 stock, $100 par (no change during year)					$939,000
	Common stock, $10 par (no change during year)					939,000
Retained earnings:
	Balance, beginning of year	$1,002,000
	Net income	381,000		$1,383,000
	Preferred dividends	$18,780
	Common dividends	112,220		131,000
	Balance, end of year					1,252,000
Total stockholders' equity						$3,130,000
Sales						$12,954,450
Interest expense						$46,920

Assuming that long-term investments totaled $2,034,000 throughout the year and that total assets were $3,866,000 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 liabilties = Fixed assets / Long term liabilities = 1407600 / 782000	1.8
b.	Ratio of liabilities to stockholders' equity = Liabilities / Stockholders' equity = 939000 / 3130000	0.3

c.	Ending total assets = Ending total liabilities + Ending stockholders' equity = 939000 + 3130000	4069000
	Average total assets = ( Beginning total assets + Ending total assets ) / 2 = ( 3866000 + 4069000 ) / 2	3967500
	Asset turnover = Sales / Average total assets = 12954450 / 3967500	3.3
d.	Return on total assets = Net income / Average Total assets = 381000 / 3967500	9.6%
e.	Beginning stockholders' equity = Preferred stock + Common stock + Beginning retained earnings = 939000 + 939000 + 1002000	2880000
	Average stockholders' equity = ( Beginning stockholders' equity + Ending stockholders' equity ) / = ( 2880000 + 3130000 ) / 2	3005000
	Return on stockholders' equity = Net income / Average Stockholders' equity = 381000 / 3005000	12.7%

f.		Beginning	Ending
	Stockholders' equity	2880000	3130000
	(-) Preferred stock	939000	939000
	Common stockholders' equity	1941000	2191000

Average common stockholders' equity = ( Beginning common stockholders' equity + Ending common stockholders' equity ) / 2 = ( 1941000 + 2191000 ) / 2	2066000
Return on common stockholders' equity = ( Net income - Preferred dividends ) / Average common stockholders' equity = ( 381000 - 18780 ) / 2066000	17.5%