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)						$1,420,800
Liabilities:
	Current liabilities			$177,000
	Note payable, 6%, due in 15 years			888,000
	Total liabilities					$1,065,000
Stockholders' equity:
	Preferred $4 stock, $100 par (no change during year)					$639,000
	Common stock, $10 par (no change during year)					639,000
Retained earnings:
	Balance, beginning of year	$682,000
	Net income	292,000		$974,000
	Preferred dividends	$25,560
	Common dividends	96,440		122,000
	Balance, end of year					852,000
Total stockholders' equity						$2,130,000
Sales						$17,755,500
Interest expense						$53,280

Assuming that total assets were $3,035,000 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

Where,

Fixed assets = 1420800

long-term liabilities = $888000

Ratio of fixed assets to long-term liabilities = 1420800 / 888000 = 1.6

.

b. Ratio of liabilities to stockholders' equity = Total liabilities / stockholders' equity

Where,

Total liabilities = 1065000

stockholders' equity = 2130000

Ratio of liabilities to stockholders' equity = 1065000 / 2130000 = 0.5

.

c. Asset turnover = sales / Average / Average total assets

Where,

sales = 17755500

Average total assets = ( Beginning + ending ) / 2

Average total assets =( 3035000 + 3195000) / 2 = 3115000

Ending total assets = Total liabilities + Total stockholders' equity

Ending total assets = 1065000 + 2130000 = 3195000

Asset turnover = 17755500 / 3115000 = 5.7

.

d. Return on total assets = Net income / Average total assets

Where,

Net income = 292000

Average total assets = 3115000

Return on total assets = 292000 / 3115000 = 0.0937 = 9.40%

.

e. Return on stockholders’ equity = Net income / Average Total stockholders’ equity

Where,

Net income = 292000

Average Total stockholders’ equity = (opening +ending) / 2

*There is no change in issued preferred stock and common equity, on change are occurred in retained earning

opening = 639000 + 639000 + 682000 = 1960000

Ending = 2130000

Average Total stockholders’ equity = ( 1960000 + 2130000 ) / 2 = 2045000

Return on stockholders’ equity = 292000 / 2045000 = 0.1427 = 14.30%

.

f. Return on common stockholders' equity = Net income / Average common stockholders' equity

Where,

Net income = 292000

Average common stockholders' equity  = (opening + ending) / 2

opening = 639000 + 682000 = 1321000

Ending = 2130000 - 639000 = 1491000

Average common stockholders' equity  = (1321000 + 1491000) / 2 = 1406000

Return on common stockholders' equity =292000 / 1406000 = 0.2076 = 20.80%