Question

Required information [The following information applies to the questions displayed below.] Simon Company’s year-end balance sheets follow.
At December 31 2017 2016 2015
Assets Cash $ 31,800 $ 35,625 $ 37,800
Accounts receivable, net 89,500 62,500 50,200
Merchandise inventory 112,500 82,500 54,000
Prepaid expenses 10,700 9,375 5,000
Plant assets, net 278,500 255,000 230,500
Total assets $ 523,000 $ 445,000 $ 377,500
Liabilities and Equity
Accounts payable $ 129,900 $ 75,250 $ 51,250
Long-term notes payable secured by
mortgages on plant assets 98,500 101,500 83,500
Common stock, $10 par value 163,500 163,500 163,500
Retained earnings 131,100 104,750 79,250
Total liabilities and equity $ 523,000 $ 445,000 $ 377,500
The company’s income statements for the years ended December 31, 2017 and 2016, follow.
For Year Ended December 31 2017 2016
Sales $ 673,500 $ 532,000
Cost of goods sold $ 411,225 $ 345,500
Other operating expenses 209,550 134,980
Interest expense 12,100 13,300
Income taxes 9,525 8,845
Total costs and expenses 642,400 502,625
Net income $ 31,100 $ 29,375
Earnings per share $ 1.90 $ 1.80
Calculate the company’s long term risk and capital structure positions at the end of 2015 and 2014 by computing the following ratios.
(1) Debt and equity ratios.
(2) Debt to equity ratios.

Answer 1

Answer:

(1) Debt and equity ratios.  (I guess the years should be 2017 and 2016)

debt ratio = liabilities / assets

equity ratio = stockholder's equity / assets

debt ratio 2016 = $155,750 / $411,250 = 37.87%

debt ratio 2017 = $202,575 / $484,000 = 41.85%

equity ratio 2016 = $255,500 / $411,250 = 62.13%

equity ratio 2017 = $281,425 / $484,000 = 58.15%

(2) Debt to equity ratios. (2017 and 2016)

debt to equity ratio = liabilities / stockholders' equity

debt to equity ratio 2016 = $155,750 / $255,500 = 60.96%

debt to equity ratio 2017 = $202,575 / $281,425 = 71.98%

Explanation:

average liabilities 2017 = ($129,900 + $75,250 + $98,500 + $101,500) / 2 = $202,575

average liabilities 2016 = ($75,250 + $51,250 + $101,500 + $83,500) / 2 = $155,750

average assets 2017 = ($523,000  + $445,000) / 2 = $484,000

average assets 2016 = ($445,000 + $377,500) / 2 = $411,250

average stockholders' equity 2017 = $484,000 - $202,575 = $281,425

average stockholders' equity 2016 = $411,250 - $155,750 = $255,500