Question

Condensed financial data are presented below for the Phoenix Corporation: 20X2 20X1 Accounts receivable $ 267,500 $ 230,000 Inventory 312,500 257,500 Total current assets 670,000 565,000 Intangible assets 50,000 60,000 Total assets 825,000 695,000 Current liabilities 252,500 200,000 Long-term liabilities 77,500 75,000 Sales 1,640,000 Cost of goods sold 982,500 Interest expense 10,000 Income tax expense 77,500 Net income 127,500 Cash flow from operations 71,000 Cash flow from investing activities (6,000 ) Cash flow from financing activities (62,500 ) Tax rate 30 % If the intangible assets in 20X2 are $50,000, then the long-term debt to tangible assets for 20X2 is:

Answer 1

Phoenix Corporation

The long-term debt to tangible assets for 20X2 is:

= 0.74.

Step-by-step explanation:

a) Data and Calculations:

20X2 20X1

Accounts receivable $ 267,500 $ 230,000

Inventory 312,500 257,500

Cash 90,000 77,500

Total current assets 670,000 565,000

Intangible assets 50,000 60,000

Tangible assets 105,000 70,000

Total assets 825,000 695,000

Current liabilities 252,500 200,000

Long-term liabilities 77,500 75,000

Equity 495,000 420,000

Total liabilities/Equity 825,000 695,000

Income Statement for year 20X2

Sales 1,640,000

Cost of goods sold 982,500

Gross profit 657,500

Operating expenses 442,500

EBIT 215,000

Interest expense 10,000

Pretax income 205,000

Income tax expense 77,500

Net income 127,500

Statement of Cash Flows:

Cash flow from operations 71,000

Cash flow from investing activities (6,000 )

Cash flow from financing activities (62,500 )

Net cash flows = 2,500

Tax rate 30 %

Long-term debt to Tangible assets = 77,500/105,000 = 0.74

b) This ratio describes the percentage of the tangible assets financed by long-term debts. It is a financial leverage ratio. The computation compares the long-term debts to the tangible assets.