Question

Question 3

1. Table 12-5
   The following are the income statements and balance sheets for Amazon Pools and Spas at and for the years ended December 31, 2X10, 2X09, and 2X08:
   Amazon Pools and Spas
   Combined Statements of Income
   For the Years Ended December 31, 2X10, 2X09, and 2X08
   
   2X10 2X09 2X08
   Sales (all credit sales) $800 $740 $675
   Less Cost of Goods Sold 525 490 450
   Gross Profit $275 $250 $225
   Less Operating Expenses 150 140 125
   Operating Income $125 $110 $100
   Less Other Expense: Interest 10 8 5
   Income before Tax $115 $102 $ 95
   Less Income Tax Expense 51 46 43
   Net Income $ 64 $ 56 $ 52
   
   
   Amazon Pools and Spas
   Consolidated Balance Sheets
   December 31, 2X10, 2X09, and 2X08
   
   2X10 2X09 2X08
   Current Assets:
   Cash $ 25 $ 20 $ 15
   Accts Receivable 90 70 60
   Inventory 65 50 40
   Prepaid Rent 10 15 5
   Total Current Assets $190 $155 $120
   Long-Term Assets:
   Equipment $160 $155 $140
   Accumulated Depreciation (100) (95) (85)
   Total Long-Term Assets $ 60 $ 60 $ 55
   Total Assets $250 $215 $175
   
   Current Liabilities:
   Accounts Payable $ 50 $ 30 $ 20
   Wages Payable 20 10 5
   Taxes Payable 10 5 15
   Current Long-Term Debt 10 15 5
   Total Current Liabilities $ 90 $ 60 $ 45
   Long-Term Liabilities:
   Long-Term Debt 35 45 40
   Total Liabilities $125 $105 $ 85
   Stockholders' Equity:
   Common Stock $5 par $ 50 $ 50 $ 50
   Retained Earnings 75 60 40
   Total Stockholders' Equity $125 $110 $ 90
   Total Liab. & Stk. Equity $250 $215 $175
   
   December 31 market price $ 50 $ 47 $ 45 per share
   
   
   Referring to Table 12-5, what is the total-debt-to-total-equity ratio for Amazon Pools and Spas in 2X10? Has the total-debt-to-total equity ratio improved or not improved since 2X09?

   		0.36, not improved
   		0.36, improved
   		1.00, improved
   		0.28, improved
   		1.00, not improved

Answer 1

The right option is 5th - " 1.00, not improved ".

Total debt to total equity ratio in 2X10 = Total liabilities in 2X10 / Total Stockholders' Equity in 2X10 = $125 / $125 = 1.00

Total debt to total equity ratio in 2X09 = Total liabilities in 2X09 / Total Stockholders' Equity in 2X09 = $105 / $110 = 0.95.

As total debt to total equity ratio has increased from last year to current year therefore, the ratio has not improved. The lower the ratio the better position is for the company.