To address the questions using financial ratios, let's calculate and analyze the relevant ratios for Cusaba Incorporated based on the provided balance sheet and income statement.

### $1.$ Would you extend trade credit to Cusaba Incorporated?

$**$Liquidity Ratios:$**$

$-**$Current Ratio$**=$ Current Assets $/$ Current Liabilities

$-$ Current Assets $=$ $$9,000($Cash$)+$ $$2,500($Marketable Securities$)+$ $$225,000($Accounts Receivable$)+$ $$162,500($Inventory$)+$ $$3,500($Prepaid Expenses$)=$ $$402,500$

$-$ Current Liabilities $=$ $$37,500($Accounts Payable$)+$ $$1,500($Accrued Expenses$)+$ $$500($Interest Payable$)=$ $$39,500$

$-$ Current Ratio $=$ $$402,500/$ $$39,50010\mathrm{.}2$

A high current ratio indicates strong liquidity, suggesting Cusaba has sufficient current assets to cover its current liabilities. This indicates a low risk of defaulting on short$-$term obligations, implying it could manage trade credit well.

$**$Decision:$**$ Yes, based on the high current ratio and strong liquidity position, extending trade credit to Cusaba would likely be prudent.

### $2.$ Would you lend long$-$term funds to Cusaba Incorporated?

$**$Solvency Ratios:$**$

$-**$Debt$-$to$-$Equity Ratio$**=$ Total Debt $/$ Total Equity

$-$ Total Debt $=$ $$87,500($Bank Loan$)+$ $$85,000($Long Term Bonds Payable$)=$ $$172,500$

$-$ Total Equity $=$ $$88,000($Common Stock$)+$ $$200,000($Retained Earnings$)=$ $$288,000$

$-$ Debt$-$to$-$Equity Ratio $=$ $$172,500/$ $$288,0000\mathrm{.}60$

A debt$-$to$-$equity ratio of $0\mathrm{.}60$ suggests that Cusaba relies moderately on debt financing, which is generally manageable. It indicates a reasonable balance between debt and equity, implying good solvency.

$**$Decision:$**$ Yes, considering the moderate debt levels and strong equity base, lending long$-$term funds to Cusaba appears feasible.

### $3.$ Why is the return on equity $($ROE$)$ higher than the return on assets $($ROA$)?$

$**$Profitability and Efficiency Ratios:$**$

$-**$Return on Equity $($ROE$)**=$ Net Income $/$ Average Shareholders' Equity

$-$ Net Income $=$ $$112,000$

$-$ Average Shareholders' Equity $=($$$88,000+$ $$200,000)/2=$ $$144,000$

$-$ ROE $=$ $$112,000/$ $$144,0000\mathrm{.}778$ or $77\mathrm{.}8\%$

$-**$Return on Assets $($ROA$)**=$ Net Income $/$ Average Total Assets

$-$ Average Total Assets $=($$$500,000+$ previous year's total assets$)/2($if data were available$)$

ROE is typically higher than ROA due to financial leverage $($the use of debt$).$ Cusaba has significant debt $($$$172,500)$ relative to equity $($$$288,000),$ which amplifies returns to equity holders through leverage. This leverage boosts ROE above ROA, as shareholders benefit from using borrowed funds to generate higher profits relative to their equity investment.

$**$Explanation:$**$ The higher ROE reflects the efficient use of debt financing to amplify returns to shareholders, while ROA represents the profitability generated from all assets, irrespective of leverage.

In summary, based on the ratios calculated:

$-$ Cusaba has strong liquidity and solvency positions, making them a suitable candidate for trade credit and long$-$term lending.

$-$ The higher ROE compared to ROA is justified by the leverage effect of debt financing.

These assessments provide a concise financial basis for decision$-$making regarding trade credit extension, long$-$term lending, and understanding the differential between ROE and ROA for Cusaba Incorporated.