The balance sheet for Shaver Corporation reported the following: cash, $5,000; short-term investments, $10,000; net accounts receivable, $35,000; inventory, $40,000; prepaids, $10,000; equipment, $100,000; current liabilities, $40,000; notes payable (long-term), $70,000; total stockholders' equity, $90,000; net income, $3,320; interest expense, $4,400; income before income taxes, $5,280.

Compute Shaver's debt-to-assets ratio and times interest earned ratio.

Question

Cecilia Lee

Business

17 March, 04:10

The balance sheet for Shaver Corporation reported the following: cash, $5,000; short-term investments, $10,000; net accounts receivable, $35,000; inventory, $40,000; prepaids, $10,000; equipment, $100,000; current liabilities, $40,000; notes payable (long-term), $70,000; total stockholders' equity, $90,000; net income, $3,320; interest expense, $4,400; income before income taxes, $5,280.

Compute Shaver's debt-to-assets ratio and times interest earned ratio.

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Answers (1)

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Ferguson · Answer 1

0.55 and 2.2

Explanation:

The computation is shown below:

For debt to asset ratio

As we know that

= Total debt: Total assets

where,

Total debt would be

= Current liabilities + Long term note payable

= $40,000 + $70,000

= $110,000

And, the total assets is

= Cash + short term investment + net account receivables + inventory + prepaid + equipment

= $5,000 + $10,000 + $35,000 + $40,000 + $10,000 + $100,000

= $200,000

So the debt to assets ratio is

= $110,000 : $200,000

= 0.55

And, the times interest earned ratio is

= Earning before interest and taxes : Interest

= ($5,280 + $4,400) : ($4,400)

= 2.2

We simply applied the above formulas