Ratio of Liabilities to Stockholders' Equity and Number of Times Interest Earned The following data were taken from the financial statements of Hunter Inc. for December 31 of two recent years: Current Year Previous Year Accounts payable $344,000 $208,000 Current maturities of serial bonds payable 350,000 350,000 Serial bonds payable, 10% 1,630,000 1,980,000 Common stock, $1 par value 70,000 90,000 Paid-in capital in excess of par 730,000 730,000 Retained earnings 2,520,000 2,000,000 The income before income tax was $534,600 and $467,800 for the current and previous years, respectively. a. Determine the ratio of liabilities to stockholders' equity at the end of each year. Round to one decimal place. Current year Previous year b. Determine the times interest earned ratio for both years. Round to one decimal place. Current year Previous year c. The ratio of liabilities to stockholders' equity has improved and the number of times bond interest charges were earned has improved from the previous year. These results are the combined result of a larger income before income taxes and lower interest expense in the current year compared to the previous year.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Ratio of Liabilities to
The following data were taken from the financial statements of Hunter Inc. for December 31 of two recent years:
| Current Year | Previous Year | |||
| Accounts payable | $344,000 | $208,000 | ||
| Current maturities of serial bonds payable | 350,000 | 350,000 | ||
| Serial bonds payable, 10% | 1,630,000 | 1,980,000 | ||
| Common stock, $1 par value | 70,000 | 90,000 | ||
| Paid-in capital in excess of par | 730,000 | 730,000 | ||
| 2,520,000 | 2,000,000 |
The income before income tax was $534,600 and $467,800 for the current and previous years, respectively.
a. Determine the ratio of liabilities to stockholders' equity at the end of each year. Round to one decimal place.
| Current year | |
| Previous year |
b. Determine the times interest earned ratio for both years. Round to one decimal place.
| Current year | |
| Previous year |
c. The ratio of liabilities to stockholders' equity has improved and the number of times bond interest charges were earned has improved from the previous year. These results are the combined result of a larger income before income taxes and lower interest expense in the current year compared to the previous year.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
