Question

# Six Measures of Solvency or Profitability The following data were taken from the financial statements of...

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

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 =

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%

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