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Chapter 2: 24BP_b (page 83)

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

b. The fixed charge 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

Fixed charge coverage ratio of the company is 1.83.

Step by step solution

01

Fixed charges before tax 

Fixedchargesbeforetaxes=Sellingandadministrativeexpenses+Leaseexpenses=$11,000+$4,000=$15,000

02

Calculation of Interest coverage ratio

Fixedchargecoverageratio=Earningbeforeinterestandtaxes+FixedchargesbeforetaxInterestexpense+Fixedchargesbeforetax=$18,000+$15,000$3,000+$15,000=1.83

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