Question

Balance sheet December 31 Assets 2007 2006 Cash $25,000 $40,000 Short term investments 15,000 60,000 Accounts...

Balance sheet
December 31
Assets 2007 2006
Cash $25,000 $40,000
Short term investments 15,000 60,000
Accounts receivable 50,000 30,000
Inventory 50,000 70,000
Property, plant and equipment (net) 160,000 200,000
Total assets $300,000 $400,000

Liabilities and stockholders equity   
Accounts payable $20,000 $30,000
Short term notes payable 40,000 90,000
Bonds payable 80,000 160,000
Common stock 60,000 45,000
Retained earnings 100,000 75,000
Total liabilities and stockholders equity $300,000 $400,000

Income statement (for the year ended December 31, 2007)

Net sales $360,000
Cost of goods sold 184,000
Gross profit 176,000
Expenses
Selling expenses 30,000
Administrative expenses 59,000
Total expenses 89,000
Income before interest expense and taxes 87,000
Interest expense 12,000
Income before income taxes 75,000
Income tax expense 30,000
Net income $45,000


Additional information
120,000 shares were outstanding in 2007:90,000 shares were outstanding in 2006
Market value of common stock on December 31, 2007 was $12 per share.

For the year of 2007:

Debt ratio is:

Long term debt ratio:

Debt to equity is:

Times interest earned ratio:

Homework Answers

Answer #1

Answer of Part 1:

Total Debt = Accounts Payable + Short term notes Payable + Bonds Payable
Total Debt = $20,000 + $40,000 + $80,000
Total Debt = $140,000

Total Assets = $300,000

Debt Ratio = Total Debt / Total Assets
Debt Ratio = $140,000 / $300,000
Debt Ratio = 0.4667 or 46.67%

Answer of Part 2:

Long term Debt Ratio = Long term Debt / Total Assets
Long term Debt Ratio = $80,000 / $300,000
Long term Debt Ratio = 0.2667 or 26.67%

Answer of Part 3:

Total Stockholder Equity = Common Stock + Retained Earning
Total Stockholders Equity = $60,000 + $100,000
Total Stockholders Equity = $160,000

Debt to Equity Ratio = Total Debt / Total Stockholders Equity
Debt to Equity Ratio = $140,000 / $160,000
Debt to Equity Ratio = 0.875

Answer of Part 4:

Times Interest Earned Ratio = EBIT / Interest Expense
Times Interest Earned Ratio = $87,000 / $12,000
Times Interest Earned Ratio = 7.25


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