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)						$1,183,700
Liabilities:
	Current liabilities			$124,000
	Note payable, 6%, due in 15 years			623,000
	Total liabilities					$747,000
Stockholders' equity:
	Preferred $4 stock, $100 par (no change during year)					$560,250
	Common stock, $10 par (no change during year)					560,250
Retained earnings:
	Balance, beginning of year	$598,000
	Net income	275,000		$873,000
	Preferred dividends	$22,410
	Common dividends	103,590		126,000
	Balance, end of year					747,000
Total stockholders' equity						$1,867,500
Sales						$11,981,475
Interest expense						$37,380

Assuming that total assets were $2,484,000 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

Gates Inc

Six measures of solvency or profitability –

1. Ratio of fixed assets to long-term liabilities –

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

Fixed assets = $1,183,700

Long-term liabilities = notes payable = $623,000

Ratio of fixed assets to long-term liabilities = $1,183,700/623,000 = 1.9

1. Ratio of liabilities to stockholders’ equity:

Liabilities to stockholders’ equity = total liabilities/stockholders’ equity

Total liabilities = $747,000

Stockholders’ equity = $1,867,500

Ratio of liabilities to stockholders’ equity = 747,000/1,867,500 = 0.4

1. Asset turnover –

Asset turnover = net sales/average assets

Average assets = (beginning assets balance + ending assets balance)/2

Beginning assets balance = $2,484,000

Ending assets balance = liabilities + stockholders’ equity = $747,000 + $1,867,500 = $2,614,500

Average assets = ($2,484,000 +$2,614,500)/2 = $2,549,250

Net sales = $11,981,475

Asset turnover ratio = 11,981,475/2,549,250 = 4.7

1. Return on total assets:

Return on total assets = net income/average assets

Net income = $275,000

Average assets = $2,549,250 =

Return total assets = 275,000/2,549,250 = 10.79%

1. Return on stockholders’ equity:

Return on stockholders’ equity = net income/stockholders’ equity

Net income = $275,000

Stockholders’ equity = $1,867,500

Return on stockholders’ equity = 275,000/1,867,500 = 14.73%

1. Return on common stockholders’ equity:

Return on common stockholders’ equity = net income/common stockholders’ equity

Common stockholders’ equity = total stockholders’ equity – preferred stock

= $1,867,500 - $560,250 = $1,307,250

Net income = $275,000

Return on common stockholders’ equity = 275,000/1,307,250 = 21.04%