The comparative financial statements prepared at December 31, 2010, for Pinnacle

Question

The comparative financial statements prepared at December 31, 2010, for Pinnacle Plus showed the following summarized data:

2010 2009 Income Statement Sales revenue* $ 110,000 $ 99,000 Cost of goods sold 52,000 48,000 Gross profit 58,000 51,000 Operating expenses 36,000 33,000 Interest expense 4,000 4,000 Income before income taxes 18,000 14,000 Income tax expense (30%) 5,400 4,200 Net income $ 12,600 $ 9,800 Balance Sheet Cash $ 49,500 $ 18,000 Accounts receivable (net) 37,000 32,000 Inventory 25,000 38,000 Property and equipment (net) 95,000 105,000 Total assets $ 206,500 $ 193,000 Accounts payable $ 42,000 $ 35,000 Income taxes payable 1,000 500 Note payable, long-term 40,000 40,000 Total liabilities 83,000 75,500 Common stock (par $10) 90,000 90,000 Retained earnings

Explanation / Answer

REQUIREMENT 7:

Times Interest Earned = (Net Income + Interest Expense + Income Tax Expense) / Interest Expense

2010 Times Interest Earned = (12,600 + 4,000 + 5,400) / 4,000 = 5.5

2009 Times Interest Earned = (9,800 + 4,000 + 4,200) / 4,000 = 4.5

Looks good, since the interest earned ratio improved from 2009 to 2010, which indicated that the sufficient net income is earned (before interest and taxes) to cover the interest expenses.

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