Question

1. Below is selected balance sheet and income statement information from Diamond Company Current assets Current liabilities Total debt Total Liabilities Equity Earnings before interest and taxes Interest expense Net cash flow from operating activities 2019 $ 46,000 37,000 130,500 216,500 85,000 28,200 4,250 19,000 2018 $ 42,000 36.000 125,000 210,000 82,100 26.400 4,120 15,000 (Required) a) Compute the current ratio for each year. b) Compute times interest earned. c) Compute liabilities-to-equity. d) Compute cash from operations to total debt ratios for each year. e) Discuss any trends for each.

Answer 1

(1)

current ratio = current assets/current liabilities

for 2019

current ratio = $46000/$37000 = 1.2432

for 2018

current ratio = $42000/$36000 = 1.6667

(2)

times interest earned = EBIT/interest expense

for 2019

times interest earned = $28200/$4250 = 6.6353

for 2018

times interest earned = $26400/$4120 = 6.4078

(3)

liabilities to equity = total liabilities/total equity

for 2019

liabilities to equity = $216500/$85000 = 2.5471

for 2018

liabilities to equity = $210000/$82100 = 2.5579

(4)

cash from operation to total debt = cash flow from operation/total debt

cash flow from operation = net cash flow from operating activities + interest expense

therefore,

for 2019

cash from operation to total debt = $28200/130500 = 0.2161

for 2018

cash from operation to total debt = $26400/$125000 = 0.2112