Question

Six Measures of Solvency or Profitability The following data were taken from the financial statements of Gates Inc. for the current fiscal year. $1,742,000 Property, plant, and equipment (net) Liabilities: Current liabilities $173,000 871,000 Note payable, 6%, due in 15 years $1,044,000 $783,000 783,000 Total liabilities Stockholders' equity: Preferred 54 stock, $100 par (no change during year) Common stock, $10 par (no change during year) Retained earnings: Balance, beginning of year Net income Preferred dividends Common dividends $1,147,000 5836,000 311,000 $31,320 71,680 103,000 Balance, end of year 1,044,000 $2,610,000 Total stockholders' equity Sales $21,375,000 Interest expense S52,260 Assuming that total assets were $3,471,000 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 = 1742000 / 871000	2
b.	Ratio of liabilities to stockholders' equity = Liabilities / Stockholders' equity = 1044000 / 2610000	0.4

c.	Ending total assets = Ending total liabilities + Ending stockholders' equity = 1044000 + 2610000	3654000
	Average total assets = ( Beginning total assets + Ending total assets ) / 2 = ( 3471000 + 3654000 ) / 2	3562500
	Asset turnover = Sales / Average total assets = 21375000 / 3562500	6.0

d.

Return on total assets = Net income / Average Total assets = 311000 / 3562500

8.7%

e.	Beginning stockholders' equity = Preferred stock + Common stock + Beginning retained earnings = 783000 + 783000 + 836000	2402000
	Average stockholders' equity = ( Beginning stockholders' equity + Ending stockholders' equity ) / = ( 2402000 + 2610000 ) / 2	5486000
	Return on stockholders' equity = Net income / Average Stockholders' equity = 311000 / 5486000	5.7%

f.		Beginning	Ending
	Stockholders' equity	2402000	2610000
	(-) Preferred stock	783000	783000
	Common stockholders' equity	1619000	1827000

Average common stockholders' equity = ( Beginning common stockholders' equity + Ending common stockholders' equity ) / 2 = ( 1619000 + 1827000 ) / 2	1723000
Return on common stockholders' equity = ( Net income - Preferred dividends ) / Average common stockholders' equity = ( 311000 - 31320 ) / 1723000	16.2%