Question

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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)						$1,455,400
Liabilities:
	Current liabilities			$152,000
	Note payable, 6%, due in 15 years			766,000
	Total liabilities					$918,000
Stockholders' equity:
	Preferred $2 stock, $100 par (no change during year)					$1,377,000
	Common stock, $10 par (no change during year)					1,377,000
Retained earnings:
	Balance, beginning of year	$1,468,000
	Net income	576,000		$2,044,000
	Preferred dividends	$27,540
	Common dividends	180,460		208,000
	Balance, end of year					1,836,000
Total stockholders' equity						$4,590,000
Sales						$25,241,350
Interest expense						$45,960

Assuming that total assets were $5,233,000 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 1.9 b. Ratio of liabilities to stockholders' equity 0.2 5.9 C. Asset turnover d. Return on total assets 19.0 13.2 X % X % e. Return on stockholders' equity [ f. Return on common stockholders' equity 5.9 X % Feedback Check My Work a. Divide property, plant, and equipment (net) by long-term liabilities b. Divide total liabilities by total stockholders'equity c. Divide sales by average total assets. Average total assets = (Beginning total assets + Ending total assets) = 2. To find ending total assets, use the accounting equation and substitute ending liabilities + stockholders' equity for the amount d. Divide the sum of net income plus interest expense by average total assets. Average total assets = (Beginning total assets + Ending total assets) = 2. To find ending total assets, use the accounting equation and substitute ending liabilities + stockholders equity for the amount. e. Divide net income by average total stockholders'equity. Average total stockholders'equity = (Beginning total stockholders'equity + Ending total stockholders'equity) = 2. f. Divide net income minus preferred dividends by average common stockholders'equity. Common stockholders'equity = Common stock + Retained earnings. Average common stockholderslequity = (Beginning common stockholders'equity + Ending common stockholders'equity) = 2.

Answer 1

Part C

Asset turnover = sales / average total assets

Total assets (current year) = total liabilities + total stockholders’ equity = 918000+4590000 = $5508000

Asset turnover = 25241350/((5233000+5508000)/2) = 4.7

Part D

Return on total assets = (net income + interest)/ average total assets = (576000+45960)/ ((5233000+5508000)/2) = 11.6%

Part E

Return on stockholders’ equity = net income /average stockholders’ equity =576000/((0+4590000)/2)= 25.1%

Part F

Return on stockholders’ (interest expense- preferred dividend) /average stockholders’ equity = (57600—27540) /((0+4590000)/2)= 1.31%