Times Interest Earned:
Times interest earned measures whether the company is in position to pay its debt obligations or not. It is also known as interest coverage ratio.
1.
To compute: Times interest earned of M Company.
Explanation of Solution
Given,
For M company
Income before interest is $200,000.
Interest expense is $60,000.
Times interest earned
Formula to calculate times interest earned,
Substitute $200,000 for income before interest and tax and $60,000 for interest expense.
Thus, times interest earned of M Company is 3.33 times.
2.
To compute: Times interest earned of W Company.
2.
Explanation of Solution
Given,
For W company
Income before interest is $400,000.
Interest expense is $260,000.
Times interest earned
Formula to calculate times interest earned,
Substitute $400,000 for income before interest and tax and $260,000 for interest expense.
Thus, times interest earned of W company is 1.54 times.
3.
To compute: Net income if sales increase by 30%.
3.
Explanation of Solution
Net income if sales increase by 30%.
Particulars | M Company ($)(given) | M Company ($)(30% increased sales) | W Company ($)(given) | W Company ($)(30% increased sales) |
Sales | 1000,000 | 1,300,000 | 1,000,000 | 1,300,000 |
Variable expenses | 800,000 | 1,040,000 | 600,000 | 780,000 |
Income before interest | 200,000 | 260,000 | 400,000 | 520,000 |
Interest expense | 60,000 | 60,000 | 260,000 | 260,000 |
Net income | 140,000 | 200,000 | 140,000 | 260,000 |
Increase in net income | 43% | 86% |
Table (1)
Working note:
Formula to calculate percentage increase in net income,
For Company M
For Company W
Thus, net income of Company M gets increased by 43% and Company W by 86%.
4.
To compute: Net income if sales increase by 50%.
4.
Explanation of Solution
Net income if sales increase by 50%.
Particulars | M Company ($)(given) | M Company ($)(50% increased sales) | W Company ($)(given) | W Company ($)(50% increased sales) |
Sales | 1000,000 | 1,500,000 | 1,000,000 | 1,500,000 |
Variable expenses | 800,000 | 1,200,000 | 600,000 | 900,000 |
Income before interest | 200,000 | 300,000 | 400,000 | 600,000 |
Interest expense | 60,000 | 60,000 | 260,000 | 260,000 |
Net Income | 140,000 | 240,000 | 140,000 | 340,000 |
Increase in net income | 71% | 143% |
Table (1)
Working Note:
Formula to calculate percentage increase in net income,
For Company M
For Company W
Thus, net income of Company M gets increased by 71% and Company W by 143%.
5.
To compute: Net income if sales increase by 80%.
5.
Explanation of Solution
Net income if sales increase by 80%.
Particulars | M Company ($)(given) | M Company ($)(80% increased sales) | W Company ($)(given) | W Company ($)(80% increased sales) |
Sales | 1000,000 | 1,800,000 | 1,000,000 | 1,800,000 |
Variable expenses | 800,000 | 1,440,000 | 600,000 | 1,080,000 |
Income before interest | 200,000 | 360,000 | 400,000 | 720,000 |
Interest expense | 60,000 | 60,000 | 260,000 | 260,000 |
Net Income | 140,000 | 300,000 | 140,000 | 460,000 |
Increase in net income | 114% | 229% |
Table (1)
Working Note:
Formula to calculate percentage increase in net income,
For Company M
For Company W
Thus, net income of Company M gets increased by 114% and Company W by 229%.
6.
To compute: Net income if sales decrease by 10%.
6.
Explanation of Solution
Net income if sales decrease by 10%.
Particulars | M Company ($)(given) | M Company ($)(10% decreased sales) | W Company ($)(given) | W Company ($)(10% decreased sales) |
Sales | 1000,000 | 900,000 | 1,000,000 | 900,000 |
Variable expenses | 800,000 | 720,000 | 600,000 | 540,000 |
Income before interest | 200,000 | 180,000 | 400,000 | 360,000 |
Interest expense | 60,000 | 60,000 | 260,000 | 260,000 |
Net Income | 140,000 | 120,000 | 140,000 | 100,000 |
Increase in net income | -14% | -29% |
Table (1)
Working note:
Formula to calculate percentage increase in net income,
For Company M
For Company W
Thus, net income of Company M gets decreased 14% and Company W by 29%.
7.
To compute: Net income if sales decrease by 20%.
7.
Explanation of Solution
Net income if sales decrease by 20%.
Particulars | M Company ($)(given) | M Company ($)(20% decreased sales) | W Company ($)(given) | W Company ($)(20% decreased sales) |
Sales | 1000,000 | 800,000 | 1,000,000 | 800,000 |
Variable expenses | 800,000 | 640,000 | 600,000 | 480,000 |
Income before interest | 200,000 | 160,000 | 400,000 | 320,000 |
Interest expense | 60,000 | 60,000 | 260,000 | 260,000 |
Net Income | 140,000 | 100,000 | 140,000 | 60,000 |
Increase in net income | -29% | -57% |
Table (1)
Working Note:
Formula to calculate percentage increase in net income,
For Company M
For Company W
Thus, net income of Company M gets decreased 29% and Company W by 57%.
8.
To compute: Net income if sales decrease by 40%.
8.
Explanation of Solution
Net income if sales decrease by 40%.
Particulars | M Company ($)(given) | M Company ($)(40% decreased sales) | W Company ($)(given) | W Company ($)(40% decreased sales) |
Sales | 1000,000 | 600,000 | 1,000,000 | 600,000 |
Variable expenses | 800,000 | 480,000 | 600,000 | 360,000 |
Income before interest | 200,000 | 120,000 | 400,000 | 240,000 |
Interest expense | 60,000 | 60,000 | 260,000 | 260,000 |
Net Income | 140,000 | 60,000 | 140,000 | (20,000) |
Increase in net income | -57% | -114% |
Table (1)
Working note:
Formula to calculate percentage increase in net income,
For Company M
For Company W
Thus, net income of Company M gets decreased 57% and Company W by 114%.
9.
Relation to fixed cost strategies of the two companies.
9.
Explanation of Solution
Relation to fixed cost strategies of the two companies,
- Here in this case fixed cost refers to interest expenses.
- Interest expenses in Company M are $ 60,000 and in Company W are $260,000. Interest expenses are higher in company W than in Company M.
- Due to higher interest expenses, change in net income gets more effected due to change in sales.
- Higher fixed cost is inversely related to times interest earned method.
- So if sales get increased, W Company enjoys higher percent increase in income in comparison to Company M.
- If sales get decreased, M Company experiences smaller percent change in net income in comparison to Company W.
Want to see more full solutions like this?
Chapter 9 Solutions
Gen Combo Ll Financial Accounting Fundamentals; Connect Access Card
- Multiple-Step and Single-Step In coin Statements The following items were derived from Gold Companys December 31 adjusted trial balance: Additional data: 1. Screen thousand share of common stock have been outstanding the entire year. 2. The income tax rate is 30% on all items of income. Required: 1. Prepare a multiple-st income statement. 2. Prepare a single step income statement. 3. Next Level Discuss how Gold Companys income statement in Requirement I might be different if it used IFRSarrow_forwardIncome Statement for Year Ended December 31, 2018 (Millions of Dollars) Net sales 795.0 Cost of goods sold 660.0 Gross profit 135.0 Selling expenses 73.5 EBITDA 61.5 Depreciation expenses 12.0 Earnings before interest and taxes (EBIT) 49.5 Interest expenses 4.5 Earnings before taxes (EBT) 45.0 Taxes (40%) 18.0 Net income 27.0 a. Calculate the ratios you think would be useful in this analysis. b. Construct a DuPont equation, and compare the companys ratios to the industry average ratios. c. Do the balance-sheet accounts or the income statement figures seem to be primarily responsible for the low profits? d. Which specific accounts seem to be most out of line relative to other firms in the industry? e. If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis? How might you correct for such potential problems?arrow_forwardAnalyze Target The following data (in millions) are taken from the financial statements of Target Corporation (TGT), the owner of Target stores: a. For Target, determine the amount of change in millions and the percent of change rounded to one decimal place from Year 1 to Year 2 for: 1. Revenue 2. Operating expenses 3. Operating income b. What conclusions can you draw from your analysis of the revenue and total operating expenses?arrow_forward
- Return on assets The following data (in millions) were adapted from recent financial statements of Tootsie Roll Industries Inc. (TR): What is Tootsie Roll’s percent of the cost of sales to sales? Round to one decimal place.arrow_forwardReturn on assets The financial statements of The Hershey Company (HSY) are shown in Exhibits 6 through 9 of this chapter. Based upon these statements, answer the following questions. The percent that a company adds to its cost of sales to determine the selling price is called a markup. That is Hershey’s markup percent? Round to one decimal place.arrow_forwardFive measures of solvency or profitability The balance sheet for Garcon Inc. at the end of the current fiscal year indicated the following: Income before income tax was 3,000,000, and income taxes were 1,200,000 for the current year. Cash dividends paid on common stock during the current year totaled 1,200,000. The common stock was selling for 32 per share at the end of the year. Determine each of the following: (a) times interest earned ratio, (b) earnings per share on common stock, (c) price-earnings ratio, (d) dividends per share of common stock, and (e) dividend yield. Round ratios and percentages to one decimal place, except for per-share amounts.arrow_forward
- Corporate Financial AccountingAccountingISBN:9781305653535Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningCollege Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,