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In: Accounting

Refer the following table. Focus Metals Inc. Comparative Balance Sheet Information November 30 (millions of $)...

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


Solutions

Expert Solution

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

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