Problem: Using the income statement for Paste Management Company
Compute the following ratios:
a. The interest coverage.
b. The fixed charge coverage.
The total assets for this company equal $80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.
c. Profit margin.
d. Total asset turnover.
e. Return on assets (investment).
PASTE MANAGEMENT COMPANY
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $126,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,000
Less: Selling and administrative expense . . . . . . . . . . . . . . . . . 11,000
Less: Lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Operating profit* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,000
Less: Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Earnings before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000
Less: Taxes (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Earnings after taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,500
*Equals income before interest and taxes.