INTERMEDIATE ACCOUNTING(LL)-W/CONNECT
INTERMEDIATE ACCOUNTING(LL)-W/CONNECT
9th Edition
ISBN: 9781260216141
Author: SPICELAND
Publisher: MCG CUSTOM
Question
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Chapter 3, Problem 3.16E

(1)

To determine

Ratio Analysis:

Ratio analysis is a tool to analyze the financial statements of a company which expresses a mathematical relationship among the items of financial statements.

To determine: The current ratio

(1)

Expert Solution
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Explanation of Solution

Current ratio:

Current ratio is a liquidity ratio, which expresses the relationship between current assets and current liabilities. Current ratio displays the short-term liquidity position of a company. It depicts how the company’s current assets are used to pay current liabilities. Current ratio can be calculated by the following formula:

Current ratio = Current assetsCurrent liabilities

Determine total current assets:

Current assets = (Cash+Short term investments+Accounts receivables+Inventories)=$200+$150+$200+$350=$900

Determine total current liabilities:

Given, Current liabilities = $400

Current ratio = Current assetsCurrent liabilities=$900$400=2.25

Conclusion

The current ratio of HB Co. is 2.25.

(2)

To determine

The acid test ratio

(2)

Expert Solution
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Explanation of Solution

Acid - Test ratio:

Acid - test ratio or Quick ratio is a liquidity ratio, which displays how current liabilities are paid by the current assets excluding prepaid expenses and inventories. Acid - test ratio is used to measure the company’s immediate short term liquidity. Current assets include cash and cash equivalents, marketable securities and short term investments. Acid-test ratio can be calculated using the formula:

Acid-test ratio = Quick assetsCurrent liabilities

Determine total quick assets:

Quick assets = (Cash+Short term investments +Accounts receivables)=$200+$150+$200=$550

Determine total current liabilities:

Given, Current liabilities = $400

Acid-test ratio = Quick assetsCurrent liabilities=$550$400=1.375

Conclusion

The acid-test ratio of HB Co. is 1.375.

(3)

To determine

Debt equity ratio:

Debt equity ratio is a long term solvency ratio, which expresses the relationship between own funds (shareholders’ equity) and loan funds (debt). This ratio shows the proportion of debts and shareholders’ equity to finance assets. It is calculated by dividing the total liabilities by total shareholders’ equity.

Debt to equity ratio = Total liablities Total shareholders' equity 

To determine: The debt equity ratio

(3)

Expert Solution
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Explanation of Solution

Determine total liabilities:

Total liabilities = (Current liabilities+Long term liabilities)=$400+$350=$750

Determine total shareholders’ equity:

Total shareholders' equity = Paid in capital+ Retained earnings=$750+$400=$1150

Debt equity ratio = Total liabilitiesTotal shareholders' equity=$750$1150=0.65

Conclusion

The debt equity ratio of HB Co. is 0.65.

(4)

To determine

Times interest earned ratio:

Times interest earned ratio indicates the relationship between earnings before interest and tax (EBIT) and interest expense. The purpose of the ratio is to know the payment of interest expense with respect to the company’s earnings.

Times interest earned ratio = Net income + Interest expense+Income taxInterest expense

To determine: The times interest earned ratio.

(4)

Expert Solution
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Explanation of Solution

Times interest earned ratio = Net income+ Interest expense+Income taxInterest expense=$160+$40+$100$40=$300$40=7.5 times

Conclusion

The times interest earned ratio of HB Co. is 7.5 times.

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Chapter 3 Solutions

INTERMEDIATE ACCOUNTING(LL)-W/CONNECT

Ch. 3 - Disclosure notes are an integral part of the...Ch. 3 - A summary of the companys significant accounting...Ch. 3 - Define a subsequent event.Ch. 3 - Prob. 3.14QCh. 3 - Prob. 3.15QCh. 3 - Prob. 3.16QCh. 3 - Prob. 3.17QCh. 3 - Show the calculation of the following solvency...Ch. 3 - Prob. 3.19QCh. 3 - Prob. 3.20QCh. 3 - (Based on Appendix 3) Segment reporting...Ch. 3 - Prob. 3.22QCh. 3 - Prob. 3.23QCh. 3 - Current versus long-term classification LO32,...Ch. 3 - Balance sheet classification LO32, LO33 The trial...Ch. 3 - Prob. 3.3BECh. 3 - Balance sheet classification LO32, LO33 Refer to...Ch. 3 - Balance sheet classification LO32, LO33 The...Ch. 3 - Balance sheet classification LO32, LO33 You have...Ch. 3 - Balance sheet preparation; missing elements LO32,...Ch. 3 - Financial statement disclosures LO34 For each of...Ch. 3 - Calculating ratios LO38 Refer to the trial...Ch. 3 - Prob. 3.10BECh. 3 - Calculating ratios; solving for unknowns LO38 The...Ch. 3 - Balance sheet; missing elements LO32, LO33, LO38...Ch. 3 - Balance sheet classification LO32, LO33 The...Ch. 3 - Balance sheet classification LO32, LO33 The...Ch. 3 - Balance sheet preparation LO32, LO33 The...Ch. 3 - Balance sheet preparation LO32, LO33 The...Ch. 3 - Balance sheet; Current versus long-term...Ch. 3 - Prob. 3.7ECh. 3 - Prob. 3.8ECh. 3 - Balance sheet preparation LO32, LO33 The...Ch. 3 - Financial statement disclosures LO34 The...Ch. 3 - Prob. 3.11ECh. 3 - Prob. 3.12ECh. 3 - Prob. 3.13ECh. 3 - FASB codification research LO32, LO34 Access the...Ch. 3 - Prob. 3.15ECh. 3 - Prob. 3.16ECh. 3 - Prob. 3.17ECh. 3 - Calculating ratios; solve for unknowns LO38 The...Ch. 3 - Prob. 3.19ECh. 3 - Effect of management decisions on ratios LO38...Ch. 3 - Prob. 3.21ECh. 3 - Prob. 3.22ECh. 3 - Balance sheet preparation LO32, LO33 Presented...Ch. 3 - Balance sheet preparation; missing elements LO32,...Ch. 3 - Balance sheet preparation LO32, LO33 The...Ch. 3 - Balance sheet preparation LO32, LO33 The...Ch. 3 - Balance sheet preparation LO32, LO33 The...Ch. 3 - Prob. 3.6PCh. 3 - Balance sheet preparation; errors LO32, LO33 The...Ch. 3 - Balance sheet; errors; missing amounts LO32, LO33...Ch. 3 - Balance sheet preparation LO32 , LO33 Presented...Ch. 3 - Prob. 3.10PCh. 3 - Communication Case 31 Current versus long-term...Ch. 3 - Analysis Case 32 Current versus long- term...Ch. 3 - Prob. 3.4BYPCh. 3 - Judgment Case 35 Balance sheet; errors LO32...Ch. 3 - Prob. 3.6BYPCh. 3 - Real World Case 37 Balance sheet and significant...Ch. 3 - Judgment Case 38 Post fiscal year-end e vents ...Ch. 3 - Prob. 3.9BYPCh. 3 - Prob. 3.10BYPCh. 3 - Prob. 3.11BYPCh. 3 - Analysis Case 314 Balance sheet information LO32...Ch. 3 - Prob. 3.15BYPCh. 3 - Ethics Case 316 Segment reporting Appendix 3 You...Ch. 3 - Prob. 1CCTC
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