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)						$1,850,200
Liabilities:
	Current liabilities			$167,000
	Note payable, 6%, due in 15 years			841,000
	Total liabilities					$1,008,000
Stockholders' equity:
	Preferred $4 stock, $100 par (no change during year)					$1,512,000
	Common stock, $10 par (no change during year)					1,512,000
Retained earnings:
	Balance, beginning of year	$1,612,000
	Net income	505,000		$2,117,000
	Preferred dividends	$60,480
	Common dividends	40,520		101,000
	Balance, end of year					2,016,000
Total stockholders' equity						$5,040,000
Sales						$24,177,700
Interest expense						$50,460

Assuming that total assets were $5,746,000 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

Answer to Requirement a.
Ratio of Fixed Assets to Long Term Liabilities = Fixed Assets / Long Term Liabilities
Ratio of Fixed Assets to Long Term Liabilities = 1,850,200 / 841,000
Ratio of Fixed Assets to Long Term Liabilities = 2.2

Answer to Requirement b.
Ratio of Liabilities to Stockholders’ Equity = Total Liabilities / Total Stockholders’ Equity
Ratio of Liabilities to Stockholders’ Equity = 1,008,000 / 5,040,000
Ratio of Liabilities to Stockholders’ Equity = 0.2

Answer to Requirement c.
Assets Turnover = Sales / Average Total Assets
Total Assets, Beginning = $5,746,000
Total Assets, Ending = $1,008,000 + $5,040,000 = $6,048,000
Average Total Assets = ($5,746,000 + $6,048,000) / 2
Average Total Assets = $5,897,000

Assets Turnover = 24,177,700 / 5,897,000
Assets Turnover = 4.1

Answer to Requirement d.
Return on Total Assets = (Net Income + Interest Expense) / Average Total Assets * 100
Return on Total Assets = ($505,000 + $50,460) / $5,897,000 * 100
Return on Total Assets = $555,460/ $5,897,000 * 100
Return on Total Assets = 9.4%

Answer to Requirement e.
Return on Stockholders’ Equity = Net Income / Average Stockholders’ Equity * 100

Beginning Stockholders’ Equity = $1,512,000 + $1,512,000 + $1,612,000 = $4,636,000
Ending Stockholders’ Equity = $5,040,000
Average Stockholders’ Equity = ($4,636,000 + $5,040,000) / 2
Average Stockholders’ Equity = $4,838,000

Return on Stockholders’ Equity = 505,000 / 4,838,000 * 100
Return on Stockholders’ Equity = 10.4%

Answer to Requirement f.
Return on Common Stockholders; Equity = (Net Income – Preferred Dividends) / Average Common Stockholders’ Equity * 100

Beginning Common Stockholders’ Equity = $1,512,000 + $1,612,000 = $3,124,000
Ending Common Stockholders’ Equity = $1,512,000 + $2,016,000 = $3,528,000
Average Common Stockholders’ Equity = ($3,124,000 + $3,528,000) / 2
Average Common Stockholders’ Equity = $3,326,000

Return on Common Stockholders’ Equity = ($505,000 - $60,480) / $3,326,000 * 100
Return on Common Stockholders’ Equity = 13.4%