Chapter 15: Q10RQ (page 835)

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

Expert verified

Debt ratio,

Debt to Equity ratio,

Times Interest Earned ratio etc.

Step by step solution

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

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

Formula:

$Debt ratio = \frac{Total Liabilities}{Total Assets}$

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;

$Debt - Equity ratio = \frac{Total Liabilities}{Total equity}$

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

Formula:

$Times interest earned ratio = \frac{Earnings before interest and tax}{Interest expense}$

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MICATIN INC. Comparative Income Statement Years Ended December 31, 2019, and 2018
Dollars in thousands	2019	2018	2017
Net Sales Revenue	\( 181,000	\) 160,000
Cost of Goods Sold	93,500	86,500
Selling and Administrative Expenses	45,000	40,500
Interest Expense	8,000	12,000
Income Tax Expense	11,000	10,500
Net Income	\( 23,500	\) 10,500

Additional data:
Total Assets	\( 209,000	\) 187,000	\( 167,000
Common Stockholders’ Equity	96,000	91,500	80,500
Preferred Dividends	2,000	2,000	0
Common Shares Outstanding During the Year	15,000	15,000	10,000

SANFIELD, INC. Comparative Income Statement Years Ended December 31, 2018, and 2017
	2018	2017
Net Sales Revenue	\( 462,000	\) 430,000
Cost of Goods Sold	236,000	213,000
Gross Profit	226,000	217,000
Operating Expense	135,000	133,000
Income from Operations	91,000	84,000
Interest Expense	8,000	12,000
Income Before Income Tax	83,000	72,000
Income Tax Expense	18,000	22,000
Net Income	\( 65,000	\) 50,000

SANFIELD, INC. Comparative Balance Sheet December 31, 2018, and 2017
	2018	2017	2016
Asset
Current Assets:
Cash	\( 99,000	\) 97,000
Accounts Receivable, Net	109,000	117,000	\( 100,000
Merchandise Inventory	142,000	164,000	207,000
Prepaid Expenses	15,000	5,000
Total Current Assets	365,000	383,000
Property, Plant, and Equipment, Net	215,000	177,000
Total Assets	\) 580,000	\( 560,000	\) 599,000

Liabilities
Total Current Liabilities	\( 222,000	\) 244,000
Long-term Liabilities	113,000	92,000
Total Liabilities	335,000	336,000

Stockholders’ Equity
Preferred Stock, 4%	92,000	92,000
Common Stockholders’ Equity, no par	153,000	132,000	85,000
Total Liabilities and Stockholders’ Equity	\( 580,000	\) 560,000