Hussain, Inc.'s income statement and other financial information for the current year is presented below. Hussain, Inc.Income StatementFor the year ended December 31Sales revenue$159,131 Cost of goods sold 64,360 Gross profit 94,771 Selling, general and administrative expenses 11,385 Operating income 83,386 Interest expense 2,847 Income before taxes 80,539 Income tax expense 3,414 Net income$77,125 Balance sheet information: Current assets$250,000 Noncurrent assets 500,000 Current liabilities 50,000 Long-term debt 100,000 Required:Part a. Perform vertical analysis of the income statement. (Round to the nearest whole percentage.)Part b. Calculate the debt-to-assets ratio. (Round to two decimal places.)Part c. Calculate the times interest
earned ratio. (Round to two decimal places.)Part d. Evaluate the company's solvency.
What will be an ideal response?
Part a
| Hussain, Inc. |
| Income Statement |
| For the year ended December 31 |
| Amount | Percent |
| Sales revenue | $159,131 | 100.0 |
| Cost of goods sold | 64,360 | 40.0 |
| Gross profit | 94,771 | 60.0 |
| Selling, general, and administrative expenses | 11,385 | 7.0 |
| Operating income | 83,386 | 52.0 |
| Interest expense | 2,847 | 2.0 |
| Income before taxes | 80,539 | 51.0 |
| Income tax expense | 3,414 | 2.0 |
| Net income | $ 77,125 | 48.0 |
Part b
Debt to Assets = Total liabilities ÷ Total assets
= $150,000 ÷ $750,000 = 0.20
Part c
Times interest earned = (Net income + Interest expense + Income tax) ÷ Interest expense
= ($77,125 + $2,847 + $3,414) = $83,386 ÷ $2,847 = 29.29
Part d
Judging from the analysis above, Hussain, Inc. appears to be solvent. It has relatively little debt with a debt-to-assets ratio of 20%, and it is easily able to cover interest payments with a times interest earned ratio of 29.29.
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