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Chapter 2: 24BP_a (page 83)

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

a. The interest coverage.

Times mirror and glass company

Sales

\(126,000

Less: Cost of goods sold

93,000

Gross profit

\)33,000

Less: selling and administrative expenses

11,000

Lease Expenses

4,000

Operating profit*

\(18,000

Less: Interest expenses

3,000

Earning before taxes

\)15,000

Less: Taxes (30%)

4,500

Earning after taxes

$10,500

*equal income before interest and taxes

Short Answer

Expert verified

The interest coverage ratio of the company is 6 times.

Step by step solution

01

Interest coverage ratio 

Interest coverage ratio is a profitability ratio. It is computed to know how an organization settle the interest expenses on its outstanding debts.

02

Calculation of Interest coverage ratio 

Interestcoverageratio=EarningbeforeinterestandtaxesInterestexpense=$18,000$3,000=6

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Most popular questions from this chapter

The Rogers Corporation has a gross profit of \(880,000 and \)360,000 in depreciation expense. The Evans Corporation also has \(880,000 in gross profit,

with \)60,000 in depreciation expense. Selling and administrative expense is $120,000 for each company. Given that the tax rate is 40 percent, compute the cash flow for both companies.

Explain the difference in cash flow between the two firms.

Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions. (LO3-5)

c. Fixed asset turnover

Dr. Zhiva虁go Diagnostics Corp.鈥檚 income statement for 20X1 is as follows:

Sales\( 2790000
Cost of goods sold1790000
Gross Profits\)1000000
Selling and administrative expenses302000
Operating profits\(698000
Interest Expense54800
Income before taxes\)643200
Taxes30%192960
Income after-tax$ 450240

Compute the profit margin for 20X1.

Jim Short鈥檚 Company makes clothing for schools. Sales in 20X1 were

\(4,820,000. Assets were as follows:

Cash

\)163,000

Accounts receivable

889,000

Inventory

411,000

New plant and equipment

520,000

Total assets

$1,983,000

a. Compute the following:

1. Accounts receivable turnover.

2. Inventory turnover.

3. Fixed asset turnover.

4. Total asset turnover.

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

The total assets for this company equal \(80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.

e. Return on assets (investment).

Times mirror and glass company

Sales

\)126,000

Less: Cost of goods sold

93,000

Gross profit

\(33,000

Less: selling and administrative expenses

11,000

Lease Expenses

4,000

Operating profit*

\)18,000

Less: Interest expenses

3,000

Earning before taxes

\(15,000

Less: Taxes (30%)

4,500

Earning after taxes

\)10,500

*equal income before interest and taxes
See all solutions

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