Shown here are condensed income statements for two different companies (both are organized as LLCs and pay no income taxes).
Required
- Compute times interest earned for Ellis Company.
- Compute times interest earned for Seidel Company.
- What happens to each company’s net income if sales increase by 10%?
- What happens to each company’s net income if sales increase by 40%?
- What happens to each company’s net income if sales increase by 90%?
- What happens to each company’s net income if sales decrease by 20%?
- What happens to each company’s net income if sales decrease by 50%?
- What happens to each company’s net income if sales decrease by 80%? Analysis Component
- Comment on the results from parts 3 through 8 in relation to the fixed-cost strategies of the two companies and the ratio values you computed in parts 1 and 2.
1.
Introduction: The times interest earned refer to the ratio of income before interest and taxes to interest earned.
To calculate: Times interest earned for company E.
Explanation of Solution
Computation of times interest earned for company E:
2.
Introduction: The times interest earned refer to the ratio of income before interest and taxes to interest earned.
To calculate: Times interest earned for company S.
Explanation of Solution
Computation of times interest earned for company S:
3.
Introduction: The net income refers to that part of income which is generated after subtracting all expenses such as cost of goods sold and other non-operating expenses, depreciation and taxes.
To calculate: The net income of each company if the sales increased by 10%.
Explanation of Solution
If sales increased by 10% for each company,
For company E;
For company S:
Computing net income for company E:
Particular | Amount |
Sales | $264,000 |
Less: variable expense (50%) | (132,000) |
Income before interest | 132,000 |
Less: Interest expense(fixed) | (90,000) |
Net income | $42,000 |
Computing net income for company S:
Particular | Amount |
Sales | $264,000 |
Less: variable expense (75%) | (180,000) |
Income before interest | 84,000 |
Less: Interest expense(fixed) | (30,000) |
Net income | $54,000 |
4.
Introduction: The net income refers to that part of income which is generated after subtracting all expenses such as cost of goods sold and other non-operating expenses, depreciation and taxes.
To calculate: The net income of each company if the sales increased by 40%.
Explanation of Solution
If sales increased by 40% for each company,
For company E;
For company S:
Computing net income for company E:
Particular | Amount |
Sales | $336,000 |
Less: variable expense (50%) | (168,000) |
Income before interest | 168,000 |
Less: Interest expense(fixed) | (90,000) |
Net income | $78,000 |
Computing net income for company S:
Particular | Amount |
Sales | $336,000 |
Less: variable expense (75%) | (252,000) |
Income before interest | 84,000 |
Less: Interest expense(fixed) | (30,000) |
Net income | $54,000 |
5.
Introduction: The net income refers to that part of income which is generated after subtracting all expenses such as cost of goods sold and other non-operating expenses, depreciation and taxes.
To calculate: The net income of each company if the sales increased by 90%.
Explanation of Solution
If sales increased by 90% for each company,
For company E;
For company S:
Computing net income for company E:
Particular | Amount |
Sales | $456,000 |
Less: variable expense (50%) | (228,000) |
Income before interest | 228,000 |
Less: Interest expense(fixed) | (90,000) |
Net income | $138,000 |
Computing net income for company S:
Particular | Amount |
Sales | $456,000 |
Less: variable expense (75%) | (342,000) |
Income before interest | 114,000 |
Less: Interest expense(fixed) | (30,000) |
Net income | $84,000 |
6.
Introduction: The net income refers to that part of income which is generated after subtracting all expenses such as cost of goods sold and other non-operating expenses, depreciation and taxes.
To calculate: The net income of each company if the sales decreased by 20%.
Explanation of Solution
If sales decreased by 20% for each company,
For company E;
For company S:
Computing net income for company E:
Particular | Amount |
Sales | $192,000 |
Less: variable expense (50%) | (96,000) |
Income before interest | 96,000 |
Less: Interest expense(fixed) | (90,000) |
Net income | $6,000 |
Computing net income for company W:
Particular | Amount |
Sales | $192,000 |
Less: variable expense (75%) | (144,000) |
Income before interest | 48,000 |
Less: Interest expense(fixed) | (30,000) |
Net income | $18,000 |
7.
Introduction: The net income refers to that part of income which is generated after subtracting all expenses such as cost of goods sold and other non-operating expenses, depreciation and taxes.
To calculate: The net income of each company if the sales decreased by 50%.
Explanation of Solution
If sales decreased by 50% for each company,
For company E;
For company S:
Computing net income for company E:
Particular | Amount |
Sales | $120,000 |
Less: variable expense (50%) | (60,000) |
Income before interest | 60,000 |
Less: Interest expense(fixed) | (90,000) |
Net income | ($30,000) |
Computing net income for company S:
Particular | Amount |
Sales | $120,000 |
Less: variable expense (75%) | (90,000) |
Income before interest | 30,000 |
Less: Interest expense(fixed) | (30,000) |
Net income | $0 |
8.
Introduction: The net income refers to that part of income which is generated after subtracting all expenses such as cost of goods sold and other non-operating expenses, depreciation and taxes.
To calculate: The net income of each company if the sales decreased by 80%.
Explanation of Solution
If sales decreased by 80% for each company,
For company E;
For company S:
Computing net income for company M:
Particular | Amount |
Sales | $48,000 |
Less: variable expense (50%) | (24,000) |
Income before interest | 24,000 |
Less: Interest expense(fixed) | (90,000) |
Net income | ($74,000) |
Computing net income for company W:
Particular | Amount |
Sales | $48,000 |
Less: variable expense (75%) | (36,000) |
Income before interest | 12,000 |
Less: Interest expense(fixed) | (30,000) |
Net loss | ($18,000) |
9.
Introduction: The net income refers to that part of income which is generated after subtracting all expenses such as cost of goods sold and other non-operating expenses, depreciation and taxes.
The time's interest earned refers to the ratio of income before interest and taxes to interest earned.
To comment: On the result for interest earned by both the companies and for part 3 to 8.
Explanation of Solution
Comments on times interest earned by both the companies are:
For company E:
The time's interest earned by company E is 1.3 times which is lesser than 2.5 times this indicates that it is difficult for the company to meet its debt and to invest in the company is riskier from the investor's point of view.
For company S:
The time's interest earned by company E is 2times which lesser than 2.5 times but the situation is better than company S, this indicates the riskier to invest in the company from an investor point of view.
Comments on the fixed cost strategies for the company The company fixed cost does not affect the net income as the sales increase but when sales start decreasing the net income is falling down and lead to losses for the company. Thus the company should increase sales or maintain sales to generate profit for the firm.
Want to see more full solutions like this?
Chapter 9 Solutions
Connect Access Card for Financial Accounting: Information and Decisions
- Comparing Two Companies in the Same Industry: Chipotle and Panera Bread Refer to the financial information for Chipotle and Panera Bread reproduced at the back of the book and answer the following questions. What was the total revenue for each company for the most recent year? By what percentage did each companys revenue increase or decrease from its total amount in the prior year? What was each companys net income for the most recent year? By what percentage did each companys net income increase or decrease from its net income for the prior year? What was the total asset balance for each company at the end of its most recent year? Among its assets, what was the largest asset each company reported on its year-end balance sheet? Did either company pay its stockholders any dividends during the most recent year? Explain how you can tell.arrow_forwardUse the following income statement of Elliott Game Theory Consulting to determine its net operating profit after taxes (NOPAT). Use 25% as the tax rate. Elliott Game Theory Consulting Income Statement for Year Ending December 31arrow_forwardusing this information, analyse the financial performance of the company using ten financial ratio analysis.arrow_forward
- Required information [The following information applies to the questions displayed below.] Shown here are condensed income statements for two different companies (assume no income taxes). Miller Company Sales Variable expenses (80%) Income before interest Interest expense (fixed) Net income Weaver Company Sales Variable expenses (608) Income before interest Interest expense (fixed) Net income Required: 1. Compute times interest earned for Miller Company and for Weaver Company. Choose Numerator: Times interest earned for Miller Company and Weaver Company. Choose Denominator: = 1 $ 1,100,000 880,000 220,000 78,000 $ 142,000 1 $ 1,100,000 660,000 440,000 298,000 $ 142,000 " = = Times interest earned Times interest earned 0 0arrow_forwardSpelman Corporation has Sales of $36,800, Depreciation Expense of $3,000, Interest Expense of $2,000, Cost of Goods Sold of $15,000, other costs of $7,800, and an average tax rate of 34 percent. What is the firm's profit margin? Please record your answer using the following format (12.54). Record your answer to two decimal places. While the answer should be given as a percentage, do NOT place a "%" directly after the number. Do not type the parentheses: just type the number!arrow_forwardRefer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement panels. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales. 1. If Cover-to-Cover Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be? 2. If Biblio Files Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be? 3. What would explain the difference between your answers for (1) and (2)? The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit. The companies have goals that are not in the relevant range. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is…arrow_forward
- Consider the following income statement for the Heir Jordan Corporation: HEIR JORDAN CORPORATIONIncome Statement Sales $ 42,900 Costs 33,900 Taxable income $ 9,000 Taxes (21%) 1,890 Net income $ 7,110 Dividends $ 3,400 Addition to retained earnings 3,710 The balance sheet for the Heir Jordan Corporation follows. Based on this information and the income statement, supply the missing information using the percentage of sales approach. Assume that accounts payable vary with sales, whereas notes payable do not. (Leave no cells blank - be certain to enter "0" whenever the item is not a constant percentage of sales. Enter each answer as a percent rounded 2 decimal places, e.g., 32.16.) HEIR JORDAN CORPORATION Balance Sheet Percentage of Sales Percentage of Sales Assets…arrow_forwardWhat is the current assets for each company? What are the short term investments for each company? What is the average account receivable for each company? What is the average inventory for each company?arrow_forwardA company has the following income statement. What is its net operating profit after taxes (NOPAT)? Round it to a whole dollar. Will need to find EBIT first. Sales $ 1,050 Costs 600 Depreciation 170 EBIT $ ? Interest expense 50 EBT $ ? Taxes (24%) ? Net income $ ?arrow_forward
- Consider the following income 'statement for the Mickey Mouse Corporation: Mickey Mouse Corporation Income Statement Sales Costs Taxable income Taxes (22%) Net income Dividends $ 2,200 Addition to retained earnings 5,912 $ 45,600 35,200 HEIR JORDAN CORPORATION Pro Forma Income Statement $ 10,400 2,288 $8,112 The projected sales growth rate is 18 percent. Prepare a pro forma income statement assuming costs vary with sales and the dividend payout ratio is constant. (Do not round) Intermediate calculations and round your answers to the nearest whole number, e.g.. 32.)arrow_forwardUse the information provided below to prepare the pro forma statement of comprehensive income for the year ended 31 December 2023. (Note the statement must reflect the gross profit,operating profit, profit before tax and profit after taxarrow_forwardwhat is my retained earning and net incomearrow_forward
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningFinancial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning