Question

Westmoreland Company Following are selected data from Westmoreland Company's financial statements.

2018 2017
Current liabilities $230,000 $160,000
Long-term debt 120,000 320,000
Stockholders' equity 420,000 540,000
Cash payments for additions to plant and equipment 45,000 32,000
Net cash flow from operating activities 80,000 51,000
Interest and principal payments 12,000 8,000
Net operating cash flows before interest and taxes 68,000 43,000
Net income 90,000 72,000
Interest expense 8,500 11,500
Income taxes 16,000 14,500
Dividends paid 15,000 30,000


Refer to the Westmoreland Company data.

The company's times interest earned ratio for 2018

a. Indicates the company cannot meet its current year interest payments out of current year earnings.
b. Shows an increase in the company's ability to pay its current debt when it comes due.
c. Decreased, which indicates the company has more cash to pay interest on its debt.
d. Increased, which indicates the company's lenders will be pleased.

Which of the following statements is true regarding valuation amounts on the balance sheet?

1. Assets are recorded at current cost.
2. Stockholders' equity reflects the current market value of the stock.
3. A variety of assumptions are used in determining amounts reported on the balance sheet.
4. Stockholders' equity reflects the amount the stockholders would receive upon liquidation.

Answer 1

Westmoreland Company

1. The company's times interest earned ratio for 2018

d. Increased, which indicates the company's lenders will be pleased.

2. The TRUE statement regarding valuation amounts on the balance sheet is:

3. A variety of assumptions are used in determining amounts reported on the balance sheet.

Step-by-step explanation:

a) Data and Calculations:

Westmoreland Company

Selected financial statements data.

2018 2017

Current liabilities $230,000 $160,000

Long-term debt 120,000 320,000

Stockholders' equity 420,000 540,000

2018 2017

Cash payments for additions

to plant and equipment 45,000 32,000

Net cash flow from operating activities 80,000 51,000

Interest and principal payments 12,000 8,000

Net operating cash flows before

interest and taxes 68,000 43,000

Net income 90,000 72,000

Interest expense 8,500 11,500

Income taxes 16,000 14,500

EBIT $114,500 $98,000

Dividends paid 15,000 30,000

Time interest earned (TIE) for 2018 =EBIT/ Interest Expense

= $114,500/$8,500

13.47x

TIE for 2017 = $98,000/$11,500

= 8.52x