Question

The balance sheet for Shaver Corporation reported the following: cash, $8,500; short-term investments, $13,500; net accounts receivable, $42,000; inventories, $47,000; prepaids, $13,500; equipment, $101,000; current liabilities, $47,000; notes payable (long-term), $77,000; total stockholders’ equity, $101,500; net income, $4,020; interest expense, $5,800; income before income taxes, $7,380.

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

Answer 1

1. Debt-to-assets ratio = Total debts/Total assets x 100

Debt-to-assets ratio = $124,000/$225,500 x 100

Debt-to-assets ratio = 54.99%

Total debts = $47,000 + $77,000 =$124,000

Total assets = $8,500 + $13,500 + $42,000 + 47,000 +$13.500 + $101,000

Total assets = $225,500

2. Times interest earned

= Earnings before interest and tax/Interest expense

= $7,380/$5,800

= 1.3 times

Step-by-step explanation:

Debt-to-assets ratio is the ratio of total debts to total assets while times interest earned is the ratio of income before interest and tax to interest expense.

Answer 2

Debt/assets ratio = 0.575

TIER = 1.27 TIMES

Step-by-step explanation:

The debt/asset ratio measures the proportion of debt to assets available to an organization.

The formula for calculating debt-to-assets is as follows:

Debt/assets ratio: Total Debt÷Total Assets

Lets add up total debts and total assets respectively and then divide them to get debt/assets ratio.

Total debts include, current liabilities, notes payable.

Total assets include, cash, net accounts receivable, inventories, prepaid, equipment.

Total debts = $47000+$77000

TD = $124000

Total Assets = $8500+$13500+$42000+$47000+$3500+$101000

TA = $215500

Debt/assets ratio = $124000÷$215500

Debt/assets ratio = 0.575

The interest cover/times interest earned ratio measures the number of times earnings before interest and tax covers the interest expense if they fall due.

Times interest earned ratio is calculated as follows;

Times interest earned ratio = EBIT ÷ INTEREST EXPENSE

TIER = $7380÷$5800

TIER = 1.27 TIMES

This means if interest expenses fall due the entity is able to pay them off 1.27 times.