Gambino Corporation has provided the following financial data:Balance SheetDecember 31, Year 2 and Year 1AssetsYear 2Year 1Current assets: Cash$139,000 $190,000 Accounts receivable, net 206,000 180,000 Inventory 103,000 100,000 Prepaid expenses 95,000 90,000 Total current assets 543,000 560,000 Plant and equipment, net 999,000 970,000 Total assets$ 1,542,000 $ 1,530,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable$109,000 $120,000 Accrued liabilities 44,000 50,000 Notes payable, short term 65,000 60,000 Total current liabilities 218,000 230,000 Bonds payable 220,000 220,000 Total liabilities 438,000 450,000 Stockholders' equity:

Question

Common stock, $5 par value 350,000  350,000   Additional paid-in capital 60,000  60,000   Retained earnings 694,000  670,000 Total stockholders' equity 1,104,000  1,080,000 Total liabilities & stockholders' equity$ 1,542,000 $ 1,530,000 Income StatementFor the Year Ended December 31, Year 2Sales (all on account)$1,370,000 Cost of goods sold 860,000 Gross margin 510,000 Operating expenses 445,308 Net operating income 64,692 Interest expense 17,000 Net income before taxes 47,692 Income taxes (35%) 16,692 Net income$  31,000 Required:a. What is the company's times interest earned ratio for Year 2?b. What is the company's debt-to-equity ratio at the end of Year 2?c. What is the company's equity multiplier at the end of Year 2?

What will be an ideal response?

Answer 1

a. Times interest earned ratio = Earnings before interest expense and income taxes ÷ Interest expense
= $64,692 ÷ $17,000 = 3.81 (rounded)

b. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity
= $438,000 ÷ $1,104,000 = 0.40 (rounded)

c. Equity multiplier = Average total assets* ÷ Average stockholders' equity*
= $1,536,000 ÷ $1,092,000 = 1.41 (rounded)

*Average total assets = ($1,542,000 + $1,530,000) ÷ 2 = $1,536,000
**Average stockholders' equity = ($1,104,000 + $1,080,000) ÷ 2 = $1,092,000