# ption 1: Ratio Analysis Exercises and Problems Use the net income

#### ption 1: Ratio Analysis Exercises and Problems

Use the net income statement for Summer Peebles, Inc., below, to do the following assigned problems.

1. Compute the following earnings coverage ratios:
1. Earnings to fixed charges.
2. Cash flow to fixed charges.
3. Earnings coverage of preferred dividends.
2. Analyze and interpret the earnings coverage ratios in (A).

Summer Peebles, Inc. Consolidated Income Statement (\$ thousands)
Year Ending December 31, 2015

Sales

\$15,000.00

Undistributed Income of Less Than 50%-Owned Affiliates

\$300.00

Total Revenue

\$15,300.00

Cost of Goods Sold

\$7,000.00

\$2,000.00

Depreciation

\$600.00

Rental Expense

\$500.00

Share of Minority Interest in Consolidated Income

\$200.00

Interest Expense

\$400.00

-\$10,700.00

Income Before Taxes

\$4,600.00

Income Taxes

Current

\$900.00

Deferred

\$400.00

-\$1,300.00

Net Income

\$3,300.00

Less Dividends

Common Stock

\$300.00

Preferred Stock

\$400.00

-\$700.00

Earnings Retained for the Year

\$2,600.00

1. The following changes occurred in current assets and current liabilities for 2015:
1. Current Accounts                      Increase (Decrease)
2. Accounts Receivable                             \$900.00
3. Notes Payable to Bank                          -\$200.00
4. Inventories                                              -\$800.00
5. Accounts Payable                                    \$700.00
6. Dividend Payable                                    -\$100.00

1. The effective tax rate is 40%.
2. Shares of minority interests in consolidated income do not have fixed charges.
3. Interest expenses include:

Interest Incurred (Except Items Below)

\$600.00

-\$300.00

Interest on Capitalized Leases

\$140.00

Interest Incurred

\$440.00

Less Interest Capitalized

-\$40.00

Interest Expense

\$400.00

1. Amortization of previously capitalized interest (included in depreciation) is \$60.
2. Interest implicit in operating lease rental payment (included in rental expense) is \$120.