17.3 5. Six Measures of Solvency or Profitability The following data were taken

Question

17.3

5.

Six Measures of Solvency or Profitability

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

Assuming that total assets were $2,823,000 at the beginning of the current fiscal year, determine the following. When required, round to one decimal place.

Assuming that total assets were $2,823,000 at the beginning of the current fiscal year, determine the following. When required, round to one decimal place.

b. Ratio of liabilities to stockholders' equity

________

c. Asset turnover

________

Property, plant, and equipment (net) $989,800 Liabilities: Current liabilities $142,000 Note payable, 6%, due in 15 years 707,000 Total liabilities $849,000 Stockholders' equity: Preferred $2 stock, $100 par (no change during year) $636,750 Common stock, $10 par (no change during year) 636,750 Retained earnings: Balance, beginning of year $680,000 Net income 306,000 $986,000 Preferred dividends $12,735 Common dividends 124,265 137,000 Balance, end of year 849,000 Total stockholders' equity $2,122,500 Sales $18,542,400 Interest expense $42,420

Explanation / Answer

a. Ratio of Fixed asset to Long Term Liabilities Ratio of Fixed asset to Long Term Liabilities=Fixed Asset/Long Term liabilities = $989800/707000=1.4 b. Ratio of Liabilities to Stockholder's Equity = Net Income /Total Stockholder's Equity =849000/2122500=0.40 c.Asset turnaver Ratio =Net SalesAsset/Average Total Asset =$18542400/$2897250=6.40 d. Return Earned on Total Asset =Annual Net Income /Average Total Asset X100 =306000/2897250X100=10.56% Average Total Asset= (Opening Asset+Ending Asset)/2 =(2823000+2971500)/2=2897250 Ending Asset= ( Total Asset= Total Liabilities & Equity)=($849000+$2122500)=$2971500 e. Return Earned on Stockholder's Equity = Net Income /Total Stockholder's Equity X100 =306000/2122500X100=14.42% f. Retrun Earned on common Stockholder's Equity = (Net Income- Prefrence Dividend) /Average Common Stockholder's Equity X100 =($306000-$12735)/$1485750X100=19.74% Common Stock's holder Equity=Total Stockholder's Equity-Prefrence Stocholder's Equity =(2122500-636750)=$1485750

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