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)						$1,737,000
Liabilities:
	Current liabilities			$193,000
	Note payable, 6%, due in 15 years			965,000
	Total liabilities					$1,158,000
Stockholders' equity:
	Preferred $2 stock, $100 par (no change during year)					$1,737,000
	Common stock, $10 par (no change during year)					1,737,000
Retained earnings:
	Balance, beginning of year	$1,852,000
	Net income	607,000		$2,459,000
	Preferred dividends	$34,740
	Common dividends	108,260		143,000
	Balance, end of year					2,316,000
Total stockholders' equity						$5,790,000
Sales						$43,356,800
Interest expense						$57,900

Assuming that total assets were $6,601,000 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 -

a. Answer -

Ratio of fixed assets to long-term liabilities:

Here,

Fixed assets = Property, plant, and equipment (net) = $1737000

And long-term liabilities = Note payable, 6%, due in 15 years = $965000

Now,

Fixed assets to long-term liabilities = Fixed assets / Long-term liabilities

Fixed assets to long-term liabilities = $1737000 / $965000

Fixed assets to long-term liabilities = 1.8 times

b. Answer -

Ratio of liabilities to stockholders' equity:

Here,

Total liabilities = $1158000 and Total stockholders' equity = $5790000

So,

Liabilities to stockholders' equity = Total liabilities / Total stockholders equity

Liabilities to stockholders' equity = $1158000 / $5790000

Liabilities to stockholders' equity = 0.2 times

c. Answer -

Asset turnover:

Total liabilities and stockholders equity = Total liabilities + Total stockholders equity

Total liabilities and stockholders equity = $1158000 + $5790000

Total liabilities and stockholders equity = $6948000

Here, Total assets are always equivalent to total liabilities and stockholders equity.

So, current year total assets = $6948000

And beginning total assets = $6601000

Therefore, Average total assets = (Beginning total assets + Ending total assets) / 2

Average total assets = ($6601000 + $6948000) / 2

Average total assets = $6774500

Now,

Asset turnover = Sales / Average total assets

Asset turnover = $43356800 / $6774500

Asset turnover = 6.4 times

d. Answer -

Return on total assets:

Here,

Net income = $607000

Interest expense = $57900

Average total assets = $6774500

Now,

Return on total assets = [(Net income + Interest expense) / Average total assets] * 100

Return on total assets = [($607000 + $57900) / $6774500] * 100

Return on total assets = 9.81%

e. Answer -

Return on stockholders’ equity:

Here,

Beginning stockholders equity = $1737000 + $1737000 + $1852000 = $5326000

Ending stockholders equity = $5790000

So, Average stockholders equity = (Beginning stockholders equity + Ending stockholders equity) / 2

Average stockholders equity = ($5326000 + $5790000) / 2

Average stockholders equity = $5558000

Now,

Return on stockholders’ equity = (Net income / Average stockholders equity) * 100

Return on stockholders’ equity = ($607000 / $5558000) * 100

Return on stockholders’ equity = 10.92%

f. Answer -

Return on common stockholders' equity:

Here,

Beginning common stockholders equity = $1737000 + $1852000 = $3589000

Ending common stockholders equity = $1737000 + $2316000 = $4053000

So,

Average common stockholders equity = (Beginning common stockholders equity + Ending common stockholders equity) / 2

Average common stockholders equity = ($3589000 + $4053000) / 2

Average common stockholders equity = $3821000

Now,

Return on common stockholders’ equity = [(Net income - Preferred dividends) / Average common stockholders equity] * 100

Return on common stockholders’ equity = [($607000 - $34740) / $3821000] * 100

Return on common stockholders’ equity = 14.97%