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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Debt ratio, ratio of liabilities to stockholders' equity, and times interest earned
Hasbro (HAS)

and Mattel. Inc. (MAT),

are the two largest toy companies in North America, liability and stockholders' equity data from recent balance sheets are shown for each company below (in millions):


The income from operations and interest expense from the income statement for both companies were as follows (in millions):


a.Determine the debt ratio for both companies. Round lo one decimal place.
b. Determine the ratio of liabilities to stockholders' equity for In both companies. Round to one decimal place.
c. Determine the times interest earned for both companies. Round to one decimal place.
d. Interpret the ratio differences between the two companies.

To determine

(a)

Introduction:

Accounting ratios are used to evaluate the financial performance of the business organisation

Debit ratio:

It measures the extents of company's leverage. It can be interpreted as proportion of company's assets financed by debts. It can be calculated by

  Debit ratio=total debt total assets

To calculate:

Debit ratio of both the companies.

Explanation
    ParticularsHM
    Total Liabilities$3,017$3,920
    Total Assets$4,721$6,553
To determine

(b)

Concept Introduction:

Ratio of liabilities to shareholders' equity or debt to equity ratio: is used to evaluate company's financial leverage, it reflects the ability of shareholders equity to cover all outstanding debts.it can be calculated as follows.

  Debt to equity ratio= total debttotal shareholders equity

To calculate:

Debt to equity ratio both the companies.

To determine

(c)

Concept Introduction:

Time interest earned TIE :

It is a matric used to measure a company's ability to meet debit obligation it can be calculated using following formula.

  Time interest earned=Earning before interest and taxes  Total Interest payable

To calculate:

Time interest earned for both the companies.

To determine

(d)

Introduction:

Accounting ratios are used to evaluate the financial performance of the business organisation

Solvency analysis:

Solvency analysis is used to evaluate companies' ability to pay its long-term debt, it also helps owner to determine the chances of firm's long-term survival, some of the ratios used for solvency analysis are as follows

To Interpret:

Ratio difference between both the companies.

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