Question

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

b. The fixed charge coverage.

Times mirror and glass company
Sales	\(126,000
Less: Cost of goods sold	93,000
Gross profit	\)33,000
Less: selling and administrative expenses	11,000
Lease Expenses	4,000
Operating profit*	\(18,000
Less: Interest expenses	3,000
Earning before taxes	\)15,000
Less: Taxes (30%)	4,500
Earning after taxes	$10,500

*equal income before interest and taxes

Short answer

Fixed charge coverage ratio of the company is 1.83.

Step-by-step solution

Fixed charges before tax 

$\begin{array}{rcl}\mathrm{Fixed}\mathrm{charges}\mathrm{before}\mathrm{taxes}& =& \mathrm{Selling}\mathrm{and}\mathrm{administrative}\mathrm{expenses}+\mathrm{Lease}\mathrm{expenses}\\ & =& \$11,000+\$4,000\\ & =& \$15,000\end{array}$

Calculation of Interest coverage ratio

$\begin{array}{rcl}\mathrm{Fixed}\mathrm{charge}\mathrm{coverage}\mathrm{ratio}& =& \frac{\mathrm{Earning}\mathrm{before}\mathrm{interest}\mathrm{and}\mathrm{taxes}+\mathrm{Fixed}\mathrm{charges}\mathrm{before}\mathrm{tax}}{\mathrm{Interest}\mathrm{expense}+\mathrm{Fixed}\mathrm{charges}\mathrm{before}\mathrm{tax}}\\ & =& \frac{\$18,000+\$15,000}{\$3,000+\$15,000}\\ & =& 1.83\end{array}$