gement Exerc eBook Video Calculator Analysis of Leverage Based on the financial

Question

gement Exerc eBook Video Calculator Analysis of Leverage Based on the financial statements of Cowan Kitchen Counters, Inc., as shown below: owan Kltchen Counters, Inc. Comparative Income Statement For Years Ended December 31, 20-2 and 20-1 20-2 20-1 Net Sales (all on account) Cost of goods sold Gross profit Operating expenses Other expense (interest) Income tax expense Net income $2,562,200 1,877,400 $684,800 318,700 24,200 174,600 $167,300 $2,160,800 1,622,100 $538,700 228,900 24,200 105,200 $180,400 Cowan Kitchen Counters, Inc. Comparative Balance Sheet December 31, 20-2 and 20-1 20-1 $242,200 247,200 20-2 $261,000 Cash Government notes Accounts receivable (net) 247,200 906,300 Previous Next Check My Work 1 more Check My Work uses remaining

Explanation / Answer

a.Debt Equity Ratio (D/E Ratio)

Debt = Bonds Payable = $ 220,000

Equity = Common Stock+ Retained Earning = $ 2,092,100

Therefore, the Debt Equity Ratio = 220,000/2092100 = 0.11: 1

b.Times Interest Earned Ratio

Earnings before Interest and Tax = Net Income + Interest Expenses + Tax Expenses

                                                            = 167,300 + 24,200 + 174,600 = $ 366,100

Total Annual Interest Payable = $ 24,200

Therefore, the Times Interest Earned Ratio = 366,100 / 24,200 = 15.13 times

c.Asset to Equity Ratio

Total Assets = $ 3,009,500

Equity = Common Stock + Retained Earning = 1,800,000 + 292,100 = $ 2,092,100

Therefore, the Asset to Equity Ratio = 3,009,500 / 2,092,100 = 1.44: 1

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