Thursday, 2 August 2012

Comparative financial statements for Heritage Antiquing Services for the fiscal year ending

Comparative financial statements for Heritage Antiquing Services for the fiscal year ending December 31 appear on the following page. The company did not issue any new common or preferred stock during the year. A total of 600 thousand shares of common stock were outstanding. The interest rate on the bond payable was 14%, the income tax rate was 40%, and the dividend per share of common stock was $0.75. The market value of the company’s common stock at the end of the year was $26. All of the company’s sales are on account.

Heritage Antiquing Services
Comparative Balance Sheet
(dollars in thousands)
This Year Last Year
  Assets
  Current assets:
     Cash $ 1,080 $ 1,210
     Accounts receivable, net 9,000 6,500
     Inventory 12,000 10,600
     Prepaid expenses 600 500






  Total current assets 22,680 18,810






  Property and equipment:
     Land 9,000 9,000
     Buildings and equipment, net 36,800 38,000






  Total property and equipment 45,800 47,000






  Total assets $ 68,480 $ 65,810












  Liabilities and Stockholders' Equity
  Current liabilities:
     Accounts payable $ 18,500 $ 17,400
     Accrued payables 900 700
     Notes payable, short term - 100






  Total current liabilities 19,400 18,200
  Long-term liabilities:
     Bonds payable 8,000 8,000






  Total liabilities 27,400 26,200






  Stockholders' equity:
     Preferred stock 1,000 1,000
     Common stock 2,000 2,000
     Additional paid-in capital 4,000 4,000






       Total paid-in capital 7,000 7,000
       Retained earnings 34,080 32,610






  Total stockholders' equity 41,080 39,610






  Total liabilities and stockholders' equity $ 68,480 $ 65,810














Heritage Antiquing Services
Comparative Income Statement and Reconciliation
(dollars in thousands)
This Year Last Year
  Sales $ 66,000 $ 64,000
  Cost of goods sold 43,000 42,000






  Gross margin 23,000 22,000






  Selling and administrative expenses:
  Selling expenses 11,500 11,000
  Administrative expenses 7,400 7,000






  Total selling and administrative expenses 18,900 18,000






  Net operating income 4,100 4,000
  Interest expense 800 800






  Net income before taxes 3,300 3,200
  Income taxes 1,320 1,280






  Net income 1,980 1,920
  Dividends to preferred stockholders 60 400






  Net income remaining for common stockholders 1,920 1,520
  Dividends to common stockholders 450 450






  Net income added to retained earnings 1,470 1,070
  Retained earnings, beginning of year 32,610 31,540






  Retained earnings, end of year $ 34,080 $ 32,610














Required:
Compute the following financial ratios for long-term creditors for this year:

1. Times interest earned ratio. (Round your answer to 1 decimal place. )

  Times interest earned ratio  

2. Debt-to-equity ratio. (Round your answer to 2 decimal places.)

  Debt-to-equity ratio  


Explanation:
1.
Calculation of the times interest earned ratio:

Times interest
  earned ratio
=
Earnings before interest
expense and income taxes
Interest expense

=
$4,100
 = 5.1
$800

2.
Calculation of the debt-to-equity ratio:

Debt-to-equity ratio =
Total liabilities
Stockholder's equity

=
$27,400
 = 0.67
$41,080