Question:
Cadux Candy Company’s income statement for the year ended December 31, 2013, reported interest
expense of $2 million and income tax expense of $12 million. Current assets listed in its balance sheet
include cash, accounts receivable, and inventories. Property, plant, and equipment is the company’s only
noncurrent asset.
Financial ratios for 2013 are listed below. Profitability and turnover ratios with balance sheet items in the
denominator were calculated using year-end balances rather than averages.
Debt to equity ratio 1.0
Current ratio 2.0
Acid-test ratio 1.0
Times interest earned ratio 17 times
Return on assets 10%
Return on shareholders’ equity 20%
Profit margin on sales 5%
Gross profit margin (gross profit divided by net sales) 40%
Inventory turnover 8 times
Receivables turnover 20 times
Required:
Prepare a December 31, 2013, balance sheet for the Cadux Candy Company.
Answer:
a. Times interest earned ratio = (Net income + Interest + Taxes) ÷ Interest = 17
(Net income + $2 + 12) ÷ $2 = 17
Net income + $14 = 17 x $2
Cadux Candy Company’s income statement for the year ended December 31, 2013, reported interest
expense of $2 million and income tax expense of $12 million. Current assets listed in its balance sheet
include cash, accounts receivable, and inventories. Property, plant, and equipment is the company’s only
noncurrent asset.
Financial ratios for 2013 are listed below. Profitability and turnover ratios with balance sheet items in the
denominator were calculated using year-end balances rather than averages.
Debt to equity ratio 1.0
Current ratio 2.0
Acid-test ratio 1.0
Times interest earned ratio 17 times
Return on assets 10%
Return on shareholders’ equity 20%
Profit margin on sales 5%
Gross profit margin (gross profit divided by net sales) 40%
Inventory turnover 8 times
Receivables turnover 20 times
Required:
Prepare a December 31, 2013, balance sheet for the Cadux Candy Company.
Answer:
a. Times interest earned ratio = (Net income + Interest + Taxes) ÷ Interest = 17
(Net income + $2 + 12) ÷ $2 = 17
Net income + $14 = 17 x $2
