In: Accounting
Refer the following table.
Focus Metals Inc. | |||
Comparative Balance Sheet Information | |||
November 30 | |||
(millions of $) | |||
2017 | 2016 | ||
Cash | $ 20 | $ 90 | |
Accounts receivable (net) | 402 | 248 | |
Inventory | 68 | 61 | |
Plant and equipment (net) | 2,626 | 2,710 | |
Accounts payable | 282 | 198 | |
Long-term notes payable* | 1,740 | 2,300 | |
Common shares | 340 | 340 | |
Retained earnings | 754 | 271 | |
*90% of the plant and equipment are secured by long-term notes
payable.
Focus Metals Inc | |||
Income Statement | |||
For Year Ended November 30 | |||
(millions of $) | |||
2017 | 2016 | ||
Net sales | $2,700 | $1,902 | |
Cost of goods sold | 942 | 732 | |
Gross profit | $1,758 | $1,170 | |
Operating expenses: | |||
Depreciation expense | $96 | $96 | |
Other expenses | 730 | 597 | |
Total operating expenses | 826 | 693 | |
Profit from operations | $932 | $477 | |
Interest expense | 130 | 164 | |
Income tax expense | 48 | 52 | |
Profit | $754 | $261 | |
Required:
Calculate Focus Metals solvency ratios for 2016 and 2017.Use
Exhibit 17.14. (Round the final answers to
2 decimal places.)
DEBIT RATIO OF 2017 AND 2016
EQUITY RATIO FOR THE YEARS
PLEDGED ASSETS TO SECURED LIABILITIES
TIME INTREST EARNED
2016 | 2017 | ||
1) | Debt ratio | 80.35% | 64.90% |
2) | Equity ratio | 19.65% | 35.11% |
3) | Pledged assets to secured liabilities | 1.06 : 1 | 1.36 : 1 |
4) | Time interest earned ratio | 2.91 times | 7.17 times |
All explanation is given below:
1) | Debt ratio | |||||
Debt ratio = total liabilities / total assets | ||||||
here, total liabilities = accounts payable + long term notes payable | ||||||
Total liabilities for 2016 = $ 198+ $ 2,300 | ||||||
total liabilities for 2016 = $ 2,498 | ||||||
Total liabilities for 2017= $ 282 + $ 1,740 | ||||||
Total liabilities for 2017= $ 2,022 | ||||||
here total assets = cash +accounts receivable ( net )+inventory +plant and equipment (net ) | ||||||
Total assets for 2016 = $ 90 +$248+$ 61+$ 2,710 | ||||||
Total assets for 2016 = $ 3,109 | ||||||
Total assets for 2017 = $ 20 +$ 402+$ 68 +$ 2,626 | ||||||
Total assets for 2017 = $ 3,116 | ||||||
Debt ratio = total liabilities / total assets | ||||||
Debt ratio for 2016= $ 2,498 / $ 3,109 | ||||||
Debt ratio for 2016= 80.35% ( rounded ) | ||||||
Debt ratio for 2017= $ 2,022 / $ 3,116 | ||||||
Debt ratio for 2017= 64.90 % ( rounded ) | ||||||
2) | Equity ratio | |||||
Equity ratio = total equity / total assets | ||||||
here total equity = common share + retained earnings | ||||||
total equity for 2016 = $ 340 +$ 271 | ||||||
total equity for 2016 = $ 611 | ||||||
total equity for 2017 = $ 340 +$ 754 | ||||||
total equity for 2017 = $ 1,094 | ||||||
here total assets = cash +accounts receivable ( net )+inventory +plant and equipment (net ) | ||||||
Total assets for 2016 = $ 90 +$248+$ 61+$ 2,710 | ||||||
Total assets for 2016 = $ 3,109 | ||||||
Total assets for 2017 = $ 20 +$ 402+$ 68 +$ 2,626 | ||||||
Total assets for 2017 = $ 3,116 | ||||||
Equity ratio = total equity / total assets | ||||||
Equity ratio for 2016= $ 611 / $ 3,109 | ||||||
Equity ratio for 2016= 19.65 % ( rounded) | ||||||
Equity ratio for 2016= $ 1,094 / $ 3,116 | ||||||
Equity ratio for 2016= 35.11 % ( rounded) |
3) | Pledged assets to secured liabilities | ||||||
Pledged assets to secured liabilities = book value of pledged assets / book value of secured liabilities | |||||||
here. Book value of pledged assets = 90 % of plant and equipment | |||||||
book value of pledged assets for 2016 = 90% *$ 2,710 | |||||||
book value of pledged assets for 2016 = $ 2,439 | |||||||
book value of pledged assets for 2017 = 90% *$ 2,626 | |||||||
book value of pledged assets for 2017= $ 2,363.40 | |||||||
book value of secured liabilities ( long term notes payable) for 2016 ( given)= $ 2,300 | |||||||
book value of secured liabilities ( long term notes payable) for 2017 ( given)= $ 1,740 | |||||||
Pledged assets to secured liabilities = book value of pledged assets / book value of secured liabilities | |||||||
Pledged assets to secured liabilities for 2016 = $ 2,439 / $ 2,300 | |||||||
Pledged assets to secured liabilities for 2016 = 1.06 : 1 | |||||||
Pledged assets to secured liabilities for 2017 = $ 2,363.40 / $ 1,740 | |||||||
Pledged assets to secured liabilities for 2017 = 1.36 : 1 | |||||||
4) | Time interest earned ratio | ||||||
Time interest earned ratio = income before interest and taxes / interest expenses | |||||||
here income before interest and taxes is profit from operations | |||||||
income before interest and taxes for 2016 ( given )= $ 477 | |||||||
income before interest and taxes for 2017 ( given ) = $ 932 | |||||||
interest expenses for 2016 ( given )= $ 164 | |||||||
interest expenses for 2017 ( given )= $ 130 | |||||||
Time interest earned ratio = income before interest and taxes / interest expenses | |||||||
Time interest earned ratio for 2016 = $ 477 / $ 164 | |||||||
Time interest earned ratio for 2016 = 2.91 times | |||||||
Time interest earned ratio for 2017 = $ 932 / $ 130 | |||||||
Time interest earned ratio for 2017 = 7.17 times |