Six Measures of Solvency or Profitability The following data were taken from the
ID: 2431102 • Letter: S
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) $1,848,000 Liabilities: Current liabilities $176,000 Note payable, 6%, due in 15 years 880,000 Total liabilities $1,056,000 Stockholders' equity: Preferred $2 stock, $100 par (no change during year) $1,056,000 Common stock, $10 par (no change during year) 1,056,000 Retained earnings: Balance, beginning of year $1,126,000 Net income 439,000 $1,565,000 Preferred dividends $21,120 Common dividends 135,880 157,000 Balance, end of year 1,408,000 Total stockholders' equity $3,520,000 Sales $28,107,450 Interest expense $52,800 Assuming that total assets were $4,347,000 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 %
Explanation / Answer
Solution a:
Fixed assets = $1,848,000
Long term liabilities = $880,000
Ratio of fixed assets to long-term liabilities = Fixed assets / Long term liabilities = $1,848,000 / $880,000 = 2.1
Solution b:
Total liabilities = $1,056,000
Total stockholder's Equity = $3,520,000
Ratio of liabilities to stockholders' equity = Total liabilities / Total stockholder's Equity
= $1,056,000 / $3,520,000 = 0.3
Solution c:
Asset turnover = Sales / Average Total Assets
Total assets at the end of year = Total liabilities + Total stockholder's equity
= $1,056,000 + $3,520,000 = $4,576,000
Total assets at the beginning of year = $4,347,000
Average total assets = ($4,347,000 + $4,576,000) / 2 = $4,461,500
Assets tunrover = $28,107,450 / $4,461,500 = 6.3 times
Solution d:
Return on total assets = EBIT / Average total assets
= ($439,000 + $52,800) / $4,461,500 = 11.02%
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