Question

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

Property, plant, and equipment (net)						$1,823,800
Liabilities:
	Current liabilities			$167,000
	Note payable, 6%, due in 15 years			829,000
	Total liabilities					$996,000
Stockholders' equity:
	Preferred $4 stock, $100 par (no change during year)					$996,000
	Common stock, $10 par (no change during year)					996,000
Retained earnings:
	Balance, beginning of year	$1,062,000
	Net income	394,000		$1,456,000
	Preferred dividends	$39,840
	Common dividends	88,160		128,000
	Balance, end of year					1,328,000
Total stockholders' equity						$3,320,000
Sales						$12,505,000
Interest expense						$49,740

Assuming that long-term investments totaled $2,158,000 throughout the year and that total assets were $4,100,000 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	2.2
b. Ratio of liabilities to stockholders' equity	0.3
c. Asset turnover
d. Return on total assets	%
e. Return on stockholders’ equity	%
f. Return on common stockholders' equity	%

Answer 1

Answer:

a. Ratio of fixed assets to long-term liabilities	2.2
b. Ratio of liabilities to stockholders' equity	0.3
c. Ratio of net sales to assets	6.1
d. Rate earned on total assets	10.6%
e. Rate earned on stockholders' equity	12.4%
f. Rate earned on common stockholders' equity	16.2%

Calculation

a. Ratio of fixed assets to long-term liabilities

The fixed assets includes the property plant and equipment. And the long term liabilities include the notes payable.

Ratio of Fixed Assets to Long-Term Liabilities = Fixes assets / Long term liabilities =

$1,823,800 / 829,000 = 2.2

b. Ratio of liabilities to stockholders' equity

It is also known as debt to equity ratio.

Ratio of Liabilities to Stockholders’ Equity = Total liabilities / Total stockholder's equity

= $996,000 / 3,320,000 = 0.3

c. Ratio of net sales to assets = Net sales / Average total assets

To calculate the average total assets. we need to add the stockholders equity plus the total liabilities and total assets, then divide it with 2.

So, Average total assets = (996,000 + 3,320,000 + 4,100,000) / 2 = 4,208,000

Then we need to deduct the long term investments; that is = 4,208,000 - 2,158,000 = 2,050,000

Hence,

Ratio of net sales to assets = $12,505,000 / 2,050,000 = 6.1

d. Rate earned on total assets = (Net income + interest expense) / Average total assets

So, first we need to add the net income with the interest expense, then divide it with the Average total assets. Average total assets is calculated in required (c).

Rate earned on total assets = ($394,000 + 49,740) / [($4,316,000 + 4,100,000) / 2]

= 443,740 / 4,208,000 = 10.55%

e. Rate earned on stockholders' equity = Net income / Average stockholder's equity

Here, we need to calculate the Average stockholder's equity. For that we need to sum the Preferred shares, Common stock, retained earnings at beginning and the total stock holders equity, then divide by 2

That is: Average stockholder's equity = ($996,000 + 996,000 + 1,062,000+ 3,320,000 ) / 2 = 6,374,000 /2 = $3,187,000

So, the Rate earned on stockholders' equity = $394,000 / 3,187,000 = 12.36%

f. Rate earned on common stockholders' equity = Net income - Preferred stock) / Average common stockholder's equity

First we need to deduct the Preferred stock dividend from the net income, then divide it with the Average common stockholder's equity.

So, Average common stockholder's equity is calculated by adding the Beginning common stockholder's equity and the ending common stockholder's equity and then divide it by 2. Beginning common stockholder's equity includes the Common stock at the beginning and the retained earnings at the beginning. Ending common stockholder's equity includes the ending retained earnings and the common stock which havent changed from beginning.

Common stockholder's equity = (996,000 + 1,062,000 + 996,000 + 1,328,000) / 2 = 4,382,000 / 2 = $2,191,000

($394,000 - 39,840) / $2,191,000 = 16.16 %