Question

S

Selected information from the comparative financial statements of ZZ Tire Company for the year ended December 31, appears below:

	2014		2013
Accounts receivable (net)	$    180,000		$200,000
Inventory	140,000		160,000
Total assets	1,200,000		800,000
Current liabilities	140,000		110,000
Long-term debt	400,000		300,000
Net credit sales	1,330,000		700,000
Cost of goods sold	900,000		530,000
Interest expense	50,000		25,000
Income tax expense	60,000		29,000
Net income	150,000		85,000

There is no preferred stock and the tax rate is 30%.

Required:

Calculate each of the following for 2014:

a.       Debt ratio

b.      Debt-to-equity ratio

c.       Times interest earned ratio

d.      Gross margin percentage

e.      Return on assets

f.        Return on common stockholders’ equity

Answer 1

a.	Debt ratio = (Current Liabilities + Long term liabilities) / Total Assets
	= (140,000 +400,000) / 1,200,000
	= 0.45
b.	Debt to Equity Ratio = (Current Liabilities + Long term liabilities) / Total Equity
	= (140,000 + 400,000) / 660,000
	= 0.82
	Total Equity = Total Assets - Long term liabilitis - Current liabilities
	= 1,200,000 -400,000 -140,000
	= 660,000
c.	Time interest earned ratio = income before interest & expense / interest expense
	= 264,285.71 / 60,000
	= 4.40
	income before interest & expense = Net income before tax - interest expense
	= 214,285.71 + 50,000
	= 264,285.71
	Net Income before tax = 150,000/.70 = 214,285.71
d.	Gross margin percentage = (Gross profit / Net sales) * 100
	=   (430,000 / 1,330,000) * 100
	= 32.33 %
	Gross profit = Net sales - cost of goods sold
	= 1,330,000 - 900,000
	= 430,000
e.	Return on assets = Net income / Average total assets
	= 150,000    / 1,000,000
	=   1.5
	Average total assets = (Beginning assets + Closing assets) /2
	= (800,000 + 1,200,000) / 2
	= 1,000,000
f.	Return on common stock holders equity = Net income/ stock holders equity
	= 150,000 / 660,000
	= 0.23