Ratio Analysis Ratio Analysis Ratio Analysis Ratio Analysis Solvency Ratios

# Ratio analysis ratio analysis ratio analysis ratio

This preview shows page 32 - 38 out of 51 pages.

Ratio Analysis Ratio Analysis Ratio Analysis Ratio Analysis Solvency Ratios Solvency Ratios Solvency ratios measure the ability of a company to survive over a long period of time. Debt to total assets and times interest earned are two ratios that provide information about debt-paying ability. Chapter 18-33 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Ratio Analysis Ratio Analysis Ratio Analysis Compute the Debt to Total Assets Ratio for 2009. Measures the percentage of the total assets that creditors provide. \$403,500 \$970,200 = 41.6% Total Debt Total Assets Debt to Total Assets Ratio = Solvency Ratios Solvency Ratios Chapter 18-34 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Ratio Analysis Ratio Analysis Ratio Analysis Compute the Times Interest Earned ratio for 2009. Provides an indication of the company’s ability to meet interest payments as they come due. \$199,000 + \$84,000 + \$18,000 \$18,000 = 16.7 times Income before Income Taxes and Interest Expense Interest Expense Times Interest Earned = Solvency Ratios Solvency Ratios Chapter 18-35 LO 6 Understand the concept of earning power, and how irregular items are presented. Earning Power and Irregular Items Earning Power and Irregular Items Earning Power and Irregular Items Earning Power and Irregular Items Earning power means the normal level of income to be obtained in the future. “Irregular” items are separately identified on the income statement. Two types are: 1. Discontinued operations. 2. Extraordinary items. These “irregular” items are reported net of income taxes. Chapter 18-36 Discontinued Operations (a) Refers to the disposal of a significant component of a business. (b) Report the income (loss) from discontinued operations in two parts: 1. income (loss) from operations (net of tax) and 2. gain (loss) on disposal (net of tax). LO 6 Understand the concept of earning power, and how irregular items are presented. Earning Power and Irregular Items Earning Power and Irregular Items Earning Power and Irregular Items Earning Power and Irregular Items Chapter 18-37 Exercise: McCarthy Corporation had after tax income from continuing operations of \$55,000,000 in 2007. During 2007, it disposed of its restaurant division at a pretax loss of \$270,000. Prior to disposal, the division operated at a pretax loss of \$450,000 in 2007. Assume a tax rate of 30%. Prepare a partial income statement for McCarthy. Exercise: McCarthy Corporation had after tax income from continuing operations of \$55,000,000 in 2007. During 2007, it disposed of its restaurant division at a pretax loss of \$270,000. Prior to disposal, the division operated at a pretax loss of \$450,000 in 2007. Assume a tax rate of 30%. Prepare a partial income statement for McCarthy. Income from continuing operations \$55,000,000 Discontinued operations: Loss from operations, net of \$135,000 tax 315,000 Loss on disposal, net of \$81,000 tax 189,000 Net income \$54,496,000 Total loss on discontinued operations 504,000 LO 6 Understand the concept of earning power, and how irregular items are presented.  #### You've reached the end of your free preview.

Want to read all 51 pages?

• • •  