Question

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

Property, plant, and equipment (net)						$1,154,400
Liabilities:
	Current liabilities			$177,000
	Note payable, 6%, due in 15 years			888,000
	Total liabilities					$1,065,000
Stockholders' equity:
	Preferred $4 stock, $100 par (no change during year)					$1,597,500
	Common stock, $10 par (no change during year)					1,597,500
Retained earnings:
	Balance, beginning of year	$1,704,000
	Net income	633,000		$2,337,000
	Preferred dividends	$63,900
	Common dividends	143,100		207,000
	Balance, end of year					2,130,000
Total stockholders' equity						$5,325,000
Sales						$34,890,800
Interest expense						$53,280

Assuming that total assets were $6,071,000 at the beginning of the current fiscal year, determine the following. When required, round to one decimal place.

a. A solvency ratio that measures how much fixed assets a company has to support its long-term debt.Ratio of fixed assets to long-term liabilities
b. A comprehensive leverage ratio that measures the relationship of the claims of creditors to stockholders' equity, calculated as total liabilities divided by total stockholders' equity.Ratio of liabilities to stockholders' equity
c. Ratio that measures how effectively a business uses its assets to generate revenues, computed as sales divided by average total assets.Asset turnover
d. A measure of the profitability of assets, without regard to the equity of creditors and stockholders in the assets.Return on total assets	%
e. A measure of profitability computed by dividing net income by average total stockholders’ equity.Return on stockholders’ equity	%
f. A measure of profitability computed by dividing net income, reduced by preferred dividend requirements, by average common stockholders' equity.Return on common stockholders' equity	%

Answer 1

Requirement-A

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

= 1,154,400 / 888,000

= 1.3

Requirement-B

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

= 1,065,000 / 5,325,000

= 0.2

Requirement-C

Assets turnover ratio = net sales / average total asssets

= 34,890,800 / 3,612,700

= 9.65 times

Average total assets = assets of previous year + assets of current year / 2

= 6,071,000 + 1,154,400 / 2

= 3,612,700

Requirement-D

Return on Assets = net income / average total assets

= 633,000 / 3,612,700

0.1752 X 100 = 17.52%