Six Measures of Liquidity or Profitability The following data were taken from th
ID: 2422620 • Letter: S
Question
Six Measures of Liquidity or Profitability The following data were taken from the financial statements of Whiting Enterprises Inc. for the current fiscal year. Assume that long-term investments totaled $1,COO,OCO for the past two years and that total assets were $14,400,000 at the beginning of the year. Property, plant and equipment (net) Current liabilities Mortgage note payable. 8%, ten-year note issued two years ago Total liabilities Stockholders' equity: Preferred $2 stock, $20 par (no change during year) Common stock. $2 par (no change during year) Retained earnings: Balance, beginning of year Net income Preferred dividends Common dividends Balance, end of year Total stockholders'equity Net sales Interest expense Ratio of fixed assets to long-term liabilities Ratio of liabilities to stockholders' equity Ratio of net sales to assets Rate earned on total assets Rate earned on stockholders' equity Rate earned on common stockholders' equity Divide property, plant and equipment (net) by long-term liabilities. Divide total liabilities by total stockholders' equity. Divide net sales by average total assets, excluding long-term investments. Average total assets = (Beginning total assets + Ending total assets) 4 2. To find ending total assets, use the accounting equation and substitute ending liabilities + stockholders' equity for the amount. Divide the sum of net income plus interest expense by average total assets. Average total assets - (Beginning total assets + Ending total assets) 4 2. To find ending total assets, use the accounting equation and substitute ending liabilities + stockholders' equity for the amount. Divide net income by average stockholders' equity. Average total stockholders' equity = (Beginning stockholders' equity + Ending stockholders' equity) 4 2. Divide net income minus preferred dividends by average common stockholders' equity. Common stockholders' equity = Common stock + Retained earnings. Average common stockholders' equity = (Beginning common stockholders' equity + Ending common stockholders' equity) 4 2.Explanation / Answer
Answer to question no.c:
Formula for net sales to assets.= Net sales/Average assets.
Given net sales =$36,400,000.
Average assets = Opening total assets+Closing total assets/2
Opening total assets -long term investments = $14,400,000.- $1,000,000
=$13,400,000.
Closing total assets =Total liabilities+Share holders account.
=$5,200,000+$10,400,000
Closing total assets = $15,600,000
Average total assets = ($13,400,000.+$15,600,000)/2
=$14,500,000.
Substituting in the equation =$36,400,000/$14,500,000.
=2.5103
Answer for subpoint d:
Rate earned on total assets = Net income+ Interest expense/average total assets.
Average total assets =(Opening total assets+Closing total assets)/2
Opening total assets = $14,400,000
Closing total assets =Total liabilities+Share holders equity
=$5,200,000+$10,400,000
=$15,600,000
Average total assets =($14,400,000+$15,600,000)/2
=$15,000,000
Substituting the values of net income + interest expense/Average total assets
=$725,000+$400,000/$15,000,000
=0.075.
Answer for subpoint e:
Average share holders equity = (Opening share holders equity+Closing share holders equity)/2
Opening share holders equity = Common share capital+Preference share capital+Opening balance of retained earnings.
=$3,000,000+$500,000+$6,525,000
=$10,025,000.
Closing share holders equity =$10,400,000.
Average share holders equity=($10,025,000.+$10,400,000)./2
=$10,212,500
Rate earned on share holders equity. = Net income/Averge share holders equity
Net income =$725,000.
Substituting the values in the formula =
=$725,000./$10,212,500
=0.07099.
Answer for subpoint f:
Rate earned on common stock holders equity.
Net income after preference dividends/Average stock holders equity.
Net income=$725,000 - $300,000
=$425,000.
Opening common holders equity=$500,000+$6,525,000 =$7,025,000
Closing stock holders equity=$500,000+$6525000+725000-300000
=$7,450,000
Average common stock holders equity =$7025000+$7,450,000/2
=$7,237,500
=$425,000/$7,237,500
=0.0587.