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5 October, 11:26

The balance sheet for Shaver Corporation reported the following: cash, $5,000; short-term investments, $10,000; net accounts receivable, $35,000; inventory, $40,000; prepaids, $10,000; equipment, $100,000; current liabilities, $40,000; notes payable (long-term), $70,000; total stockholders' equity, $90,000; net income, $3,320; interest expense, $4,400; income before income taxes, $5,280.

Compute Shaver's debt-to-assets ratio and times interest earned ratio.

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  1. 5 October, 14:16
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    0.55 and 2.2

    Explanation:

    The computation is shown below:

    For debt to asset ratio

    As we know that

    = Total debt: Total assets

    where,

    Total debt would be

    = Current liabilities + Long term note payable

    = $40,000 + $70,000

    = $110,000

    And, the total assets is

    = Cash + short term investment + net account receivables + inventory + prepaid + equipment

    = $5,000 + $10,000 + $35,000 + $40,000 + $10,000 + $100,000

    = $200,000

    So the debt to assets ratio is

    = $110,000 : $200,000

    = 0.55

    And, the times interest earned ratio is

    = Earning before interest and taxes : Interest

    = ($5,280 + $4,400) : ($4,400)

    = 2.2

    We simply applied the above formulas
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