Question

Refer to the Simon Company information in Exercises 13-6 and 13-8. Compare the company’s long-term risk and capital structure positions at the end of 2017 and 2016 by computing these ratios:

(1) debt and equity ratios—percent rounded to one decimal,

(2) debt-to-equity ratio—rounded to two decimals, and

(3) times interest earned—rounded to one decimal. Comment on these ratio results.

Short answer

1) The debt ratio for 2017 and 2016 is 43.7% and 39.7 %.

The equity ratio for 2017 and 2016 is 56.33%and 60.28%.

2) Debt to equity ratios for 2017 and 2016 is0.78and 0.66.

3) Times Interest Earned Ratio for 2017 and 2016 are4.4and 3.9.

Step-by-step solution

Meaning of Ratios

Accounting ratios compare two or more financial factors to analyze a company's financial accounts. It may be a valuable asset utilized by lenders, proprietors, and other partners to assess businesses' financial strength, profitability, and steadiness.

(a) Computing debt and equity ratios

The debt ratio is calculated as follows:

Particulars	2017	2016
	Amount ($)	Amount ($)
Liabilities:
Accounts payable	129,000	75,250
Long-term notes payable	98,500	101,500
Total liabilities (A)	227,500	176,750
Total Assets (B)	523,000	445,000
Debt ratio (A/B)	43.7%	39.7%

Analysis

As a result, the debt ratios for the current year and the previous one are 43.7% and 39.7%,respectively. The organization's debt ratio has increased from 39.7% to 43.7%.It suggests that the capital structure's debt portion is increasing. The debt ratio is thereforeunfavorable.

Particulars	2017	2016
	Amount ($)	Amount ($)
Equity:
Common stock, $10 par value	163,500	163,500
Retained Earnings	131,100	104,750
Total Equity (A)	294,600	268,250
Total Assets (B)	523,000	445,000
Equity Ratio (A/B)	56.33%	60.28%

Analysis

The equity ratio is therefore56.33%for the current year and60.28%for the previous year. The organization's debt ratio has decreased from 56.33%to 60.28%.It suggests that the equity portion of the capital structure is declining. The equity ratio is therefore unfavorable.

(b) Computing debt-to-equity ratio

The equity ratio is calculated as below:

Particulars	2017	2016
	Amount ($)	Amount ($)
Liabilities:
Account payable	129,900	75,250
Long-term note payable	98,500	101,500
Total liabilities (A)	227,500	176,750
Equity:
Common stock, $10 par value	163,500	163,500
Retained Earnings	131,100	104,750
Total Equity (B)	294,600	268,250
Debt to Equity ratio (A/B)	0.78	0.66

Analysis

The debt-to-equity ratio thus stands at 0.78 for the current year and0.66 for 2016. The organization's debt-to-equity ratio has increased from 0.66 to 0.78. It suggests that the capital structure's debt portion is growing. The debt to equity ratio is therefore unfavorable.

(c) Computing times interest earned

Particulars	2017	2016
	Amount ($)	Amount ($)
Income before interest expense and income taxes:
Net Income	31,100	29,375
Add: Income taxes	9,525	8,845
Add: Interest expense	12,100	13,300
Total Income before interest expense and income taxes (A)	52,725	51,520
Interest expense (B)	12,100	13,300
Times Interest Earned Ratio (A/B)	4.4	3.9

Therefore, the time interest earned ratio is 4.4 for 2017 and 3.9 for 2016, respectively. The organization's time interest earned ratio has increased from 3.9 to 4.4. It shows that the company has enough net income before interest and income tax expenses are deducted to cover the interest and other fixed changes.