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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Debt Management Ratios

Refer to Steel’s financial statements in Exercise 12-76.

Required:

1. Compute the five debt management ratios for 2018 and 2019 (rounded to two decimal places).

2. CONCEPTUAL CONNECTION Indicate whether the ratios have changed and whether the ratios suggest that Steele is more or less risky for long-term creditors at December 31. 2019, than at December 31, 2018.

s

To determine

(a)

Introduction:

The debt management ratio tells the information of debts and equity that forms the capital structure of a firm. The debt management ratios help to calculate the proportion of debt in the capital structure.

To calculate:

The debt management ratio of Steele’s for 2018 and 2019.

Explanation

Time interest earned=Operating incomeInterest expense

Time interest earned for 2019 =$701,556$63,685

= 11.01

Time interest earned for 2018 =$788,698$62,398

= 12.63

Longterm Debt-equity ratio=long-term debtsTotal equity

Long-term debt equity ratio for 2019 =$650,000$2,441,293

= 0.26:1

Long-term debt equity ratio for 2018 =$541,639$2,267,617

= 0.23:1

Debt-equity ratio=Total liabilitiesTotal Equity

Debt-equity ratio for 2019 =$1,693,812$2,441,293

= 0.69:1

Debt-equity ratio for 2018 =$1,578,833$2,267,617

= 0

To determine

(b)

To indicate:

Whether the ratios have changed from 2018 to 2019 and suggest if the company is riskier for long-term creditors on 31st Dec 2019 than on 31st Dec 2018.

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