Answer:
Current Ratio = Current assets/Current liabilities
= 96,000/42,000
= 2.29
Cash flow to Debt services ratio = Ending Cash/Interest Expense
= $4,000/$4,800 = 0.833
Debt to Assets ratio = Total liabilities/Total assets
=$58,000/$140,000
= 0.41
The previous year's financial statements would enable one to properly calculate the cash flow to debt service ratio. The figures used in this situation were approximations of the correct figures.
Explanation:
a) Data and Calculations:
Balance Sheet:
Assets Liabilities and Equity
Cash $4,000 Accounts payable $30,000
Accounts receivable 52,000 Notes payable 12,000
Inventory 40,000 Total current liabilities 42,000
Total current assets 96,000 Long-term debt 36,000
Fixed assets 44,000 Equity 62,000
Total assets $140,000 Total liabilities and equity $140,000
Income Statement
Sales (all on credit) $200,000
Cost of goods sold 130,000
Gross margin 70,000
Selling and administrative expenses 20,000
Depreciation 8,000
EBIT 42,000
Interest expense 4,800
Earning before tax 37,200
Taxes 11,160
Net income $26,040
Current Ratio = Current assets/Current liabilities
= 96,000/42,000
= 2.29
Cash flow to Debt services ratio = Ending Cash/Interest Expense
= $4,000/$4,800 = 0.833
Debt to Assets ratio = Total liabilities/Total assets
=$58,000/$140,000
= 0.41
