Question

Financial​ ratios: Financial leverage. The financial statements for Tyler​ Toys, Inc. are shown below. Calculate the debt​ ratio, times interest earned​ ratio, and cash coverage ratio for 2013 and 2014 for Tyler Toys. Should any of these ratios or the change in a ratio warrant concern for the managers of Tyler Toys or the​ shareholders?

Tyler Toys, Inc.
Income Statement for Years Ending December 31, 2013 and 2014
	2014	2013
Revenue	$14,147,996	$13,566,458
Cost of goods sold	$-8,448,120	$-8,131,722
Selling, general, and administrative expenses	$-998,889	$-981,908
Depreciation	$-1,497,938	$-1,472,552
EBIT	$3,203,049	$2,980,276
Interest expense	$-376,826	$-355,607
Taxes	$-1,073,965	$-997,374
Net income	$1,752,258	$1,627,295

                                                                                                       

Tyler Toys, Inc.
Balance Sheet as of December 31, 2013 and 2014
ASSETS	2014	2013	LIABILITIES	2014	2013
Current assets			Current liabilities
Cash	$191,401	$186,591	Accounts payable	$1,546,332	$1,456,738
Investments	$181,004	$121,148	Short-term debt	$312,545	$333,684
Accounts receivable	$667,879	$630,653	Total current liabilities	$1,858,877	$1,790,422
Inventory	$588,863	$564,957	Long-term liabilities
Total current assets	$1,629,147	$1,503,349	Debt	$7,286,198	$6,603,683
Long-term assets			Other liabilities	$1,463,915	$1,345,076
Investments	$3,054,247	$2,828,820	Total liabilities	$10,608,990	$9,739,181
Plant, property, and equipment	$8,497,918	$8,481,883	OWNERS’ EQUITY
Goodwill	$347,478	$346,589	Common stock	$1,458,147	$1,454,033
Intangible assets	$1,157,338	$957,445	Retained earnings	$2,618,991	$2,924,872
			Total owners’ equity	$4,077,138	$4,378,905
			TOTAL LIABILITIES
TOTAL ASSETS	$14,686,128	$14,118,086	AND OWNERS’ EQUITY	$14,686,128	$14,118,086

What is the debt ratio for​ 2014? ________ ​(Round to four decimal​ places.)

What is the debt ratio for​ 2013? ________ ​(Round to four decimal​ places.)

What is the times interest earned ratio for​ 2014? ________ ​(Round to four decimal​ places.)

What is the times interest earned ratio for​ 2013? _______ ​(Round to four decimal​ places.)

What is the cash coverage ratio for​ 2014? ______ ​(Round to four decimal​ places.)

What is the cash coverage ratio for​ 2013? ______ ​(Round to four decimal​ places.)

Should any of these ratios or the change in a ratio warrant concern for the managers of Tyler Toys or the​ shareholders? (Select the best​ response.)

A. The debt ratio is very high and would warrant concern if the cash coverage ratio or the times interest earned ratio was​ high, but with low ratios this means they are handling their large debt well.

B. The debt ratio is very low and would warrant concern if the cash coverage ratio or the times interest earned ratio was​ high, but with low ratios this means they are handling their large debt well.

C. The debt ratio is very high and would warrant concern if the cash coverage ratio or the times interest earned ratio was​ low, but with high ratios this means they are handling their large debt well.

D. The debt ratio is very low and would warrant concern if the cash coverage ratio or the times interest earned ratio was​ low, but with high ratios this means they are handling their large debt well.

Answer 1

PARTICULARS	2014	2013
A.TOTAL LIABILITIES	106,08,990.00	97,39,181.00
B.TOTAL ASSETS	146,86,128.00	141,18,086.00
C.DEBT RATIO(A/B)	0.7224	0.6898
D.EBIT	32,03,049.00	29,80,276.00
E.INTEREST EXPENSE	3,76,826.00	3,55,607.00
F.INTEREST EARNED RATIO (D/E)	8.5001	8.3808
G.CASH & CASH EQUIVALENTS	1,91,401.00	1,86,591.00
H.CURRENT LIABILITIES	18,58,877.00	17,90,422.00
I.CASH COVERAGE RATIO (G/H)	0.1030	0.1042

C. The debt ratio is very high and would warrant concern if the cash coverage ratio or the times interest earned ratio was​ low, but with high ratios this means they are handling their large debt well.