Financial Statements for Sarosa Company Appear Below $\quad$ $\quad$

Essay

Financial statements for Sarosa Company appear below:
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Sarosa Company
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Statement of Financial Position
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ December 31, Year 2 and Year 1
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ (dollars in thousands)

$\begin{array}{l}\begin{array}{lll}\\\text {Current assets:}\\\text {Cash and marketable securities }\\\text {Accounts receivable, net }\\\text {Inventory}\\\text {Prepaid expenses}\\\text {Total current assets}\\\text {Noncurrent assets:}\\\text {Plant \& equipment, net }\\\text {Total assets}\\\end{array}\begin{array}{lll}\text { Year 2 }\\\\\$ 150 \\\$ 190 \\\$ 150 \\\$ 40 \\ \$ 530\\\\\$1,990\\\$2,520\end{array}\begin{array}{ll}\text { Year 1 }\\\\\$ 120 \\\$ 160 \\\$ 150 \\\$ 40 \\ \$ 470 \\\\\$ 1.980 \\\$ 2.450\end{array}\end{array}$
$\begin{array}{l}\begin{array}{lll}\text {Current liabilities:}\\\text {Accounts payable}\\\text {Accrued liabilities}\\\text {Notes payable, short term}\\\text {Total current liabilities}\\\text {Noncurrent liabilities}\\\text {Bonds payable}\\\text {Total liabilities}\\\text {Shareholders' equity:}\\\text {Preferred shares, \$ 20 par, 10\%}\\\text {Common shares, \$ 10 par}\\\text {Additional paid-in capital-common shares}\\\text {Retained earnings}\\\text {'Total shareholders' equity}\\\text { Total liabilities \& shareholders' equity}\\\end{array}\begin{array}{lll}\\\$ 140 & \$ 170 \\\$ 10 & \$ 40 \\\$ 190 & \$ 200 \\\$ 340 & \$ 410 \\\\\$ 370 & \$ 400 \\ \$ 710 & \$ 810 \\\\\$ 100 & \$ 100 \\\$ 220 & \$ 220 \\\$ 250 & \$ 250 \\\$ 1.240 & \$ 1.070 \\\$ 1.810 & \$ 1.640 \\ \$ 2.520 & \$ 2,450\end{array}\end{array}$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Sarosa Company
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Income Statement
$\quad$$\quad$ For the Year Ended December 31 , Year 2
$\quad$$\quad$$\quad$$\quad$$\quad$ (dollars in thousands)
$\begin{array}{l}\begin{array}{lll}\text {Sales (all on account)}\\\text {Cost of goods sold}\\\text {Gross margin}\\\text {Operating expenses}\\\text {Net opcrating income}\\\text {Interest expense}\\\text {Net income before taxes}\\\text {Income taxes (30 \%) }\\\text {Net income}\\\end{array}\begin{array}{lll}\$ 1,870 \\\$ 1,300 \\ \$ 570 \\\$ 220 \\ \$ 350 \\\$ 40 \\ \$ 310 \\\$ 93 \\ \$ 217\end{array}\end{array}$ Required:
a)Calculate Sarosa Company's return on total assets for Year 2.
b)Calculate Sarosa Company's return on common shareholders' equity for Year 2.
c)Financial leverage was positive for Year 2.Why?
d)Assume all current liabilities are interest free and that the interest expense of $40 is for the bonds payable.
(i)Calculate the dollar amount of the financial leverage (in $1,000)
(ii)Allocate the dollar amount of the financial leverage to the following sources of financing: Preferred Shares,Bonds Payable,and Current Liabilities (rounded to the nearest $1,000)