Question

TEW COMPANY Balance Sheet As of December 31 ASSETS Cash $ 20,000 Accounts receivable 80,000 Inventory 50,000 Net plant and equipment 250,000 Total assets $ 400,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Accounts payable $ 40,000 Accrued expenses 60,000 Long-term debt 130,000 Common stock 100,000 Paid-in capital 10,000 Retained earnings 60,000 Total liabilities and stockholders’ equity $ 400,000 TEW COMPANY Income Statement For the year ended December 31 Sales (all on credit) $ 500,000 Cost of goods sold 200,000 Gross profit $ 300,000 Sales and administrative expenses 20,000 Fixed lease expenses 10,000 Depreciation 40,000 Operating profit $ 230,000 Interest expense 20,000 Profit before taxes $ 210,000 Taxes (35%) 73,500 Net income $ 136,500 Refer to the tables above. The firm's debt to assets ratio is ____.

Answer 1

ANSWER: 57.5%

Debt to assets ratio:

= Total Liabilities / Total Assets

Given:

Cash $20,000

Accounts Receivable $80,000

Inventory $50,000

Net Plant and Equipment $250,000

Total Assets: $400,000

Accounts Payable $40,000

Accrued Expenses $60,000

Long Term Debt $130,000

Total Liabilities: $230,000

Computation:

= $230,000 / $400,000

= 57.5%

The interpretation of the figures shown is that 57.5% of the total assets are financed by the creditors of company instead of investors being funded by borrowing compared as how much was funded by the investors.

Generally, 40℅ ratio or lower is considered as a good debt ratio. Above than 60℅ ratio is said as poor ratio, because of the risk that the company will not be able to generate cash flows to finance and pay its debts.

Therefore, TEW Company has a normal and efficient ratio of 57.5% and is able to pay its debts.