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Chapter 15: Q10RQ (page 835)

Briefly describe the ratios that can be used to evaluate a company鈥檚 ability to pay long-term debt.

Short Answer

Expert verified

Debt ratio,

Debt to Equity ratio,

Times Interest Earned ratio etc.

Step by step solution

01

Step 1:Meaning of Ratio

The ratio describes the link between the two things and shows the relation and effect of one on another.

02

Step 2:Explanation of some ratios used by the companies to evaluate their ability to pay long-term debt

  1. Thedebt ratioshows the relation between the company's assets and debts and indicates how much of the assets are financed by the debt.

Formula:

Debt鈥�ratio=Total鈥�LiabilitiesTotal鈥�Assets

2. Debt equityratioshows the relation between the amounts and how much of the capital employed is divided among the company's owners or creditors.

Formula;

Debt - Equity鈥�ratio=Total鈥�LiabilitiesTotal鈥�equity

3. Thetimes-Interest-Earned ratioindicates the business's ability to pay interest expenses or debt obligations.

Formula:

Times鈥�interest鈥�earned鈥�ratio=Earnings鈥�before鈥�interest鈥�and鈥�taxInterest鈥�expense

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Most popular questions from this chapter

Determining the effects of business transactions on selected ratios Financial statement data of Style Traveler Magazine include the following items:

Cash

\( 23,000

Accounts Receivable, Net

81,000

Merchandise Inventory

185,000

Total Assets

635,000

Accounts Payable

99,000

Accrued Liabilities

37,000

Short-term Notes Payable

51,000

Long-term Liabilities

224,000

Net Income

68,000

Common Shares Outstanding

20,000 shares

Requirements

  1. Compute Style Traveler鈥檚 current ratio, debt ratio, and earnings per share. Round all ratios to two decimal places, and use the following format for your answer:

Current Ratio Debt Ratio Earnings per Share

2.Compute the three ratios after evaluating the effect of each transaction that follows. Consider each transaction separately

  1. Purchased merchandise inventory of \)49,000 on the account.
  2. Borrowed \(127,000 on a long-term note payable.
  3. Issued 2,000 shares of common stock, receiving cash of \)107,000.
  4. Received cash on account, $5,000.

The following data are adapted from the financial statements of Bridget鈥檚 Shops, Inc.:

Total Current Assets $ 1,216,000

Accumulated Depreciation 2,000,000

Total Liabilities 1,540,000

Preferred Stock 0

Debt Ratio 55%

Current Ratio 1.60

Prepare Bridget鈥檚 condensed balance sheet as of December 31, 2018.

Preparing common-size statements, analysis of profitability and financial position, comparison with the industry, and using ratios to evaluate a company

Consider the data for Randall Department Stores presented in Problem P15-31B.

Requirements

  1. Prepare a common-size income statement and balance sheet for Randall. The first column of each statement should present Randall鈥檚 common-size statement, and the second column, the industry averages.
  2. For the profitability analysis, compute Randall鈥檚 (a) gross profit percentage and (b) profit margin ratio. Compare these figures with the industry averages. Is Randall鈥檚 profit performance better or worse than the industry average?
  3. For the analysis of financial position, compute Randall鈥檚 (a) current ratio and (b) debt to equity ratio. Compare these ratios with the industry averages. Assume the current ratio industry average is 1.47, and the debt to equity industry average is 1.83. Is Randall鈥檚 financial position better or worse than the industry averages?

Great Value Optical Company reported the following amounts on its balance sheet at

December 31, 2018 and 2017:

2018 2017

Cash and Receivables \( 80,640 \) 80,575

Merchandise Inventory 56,840 54,450

Property, Plant, and Equipment, Net 142,520 139,975

Total Assets \( 280,000 \) 275,000

Prepare a vertical analysis of Great Value鈥檚 assets for 2018 and 2017.

What are some common red flags in financial statement analysis?
See all solutions

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