Homework SourseSOF Antiques SOF reported the following comparative income f
SOF Antiques (SOF) reported the following comparative income figures in 2006.
Your boss, the president of Alvarez Bank, is concerned about SOF\'s borrowing capacity. A representative of SOF feels that there should be no problem, since net profits are the same with slightly higher sales.
Required:
Compute times interest earned and comment on the bank\'s position.
| 2006 | 2005 | |
| Net Sales | $701 | $646 |
| Other income | 10 | 8 |
| $711 | $654 | |
| Costs and expenses: | ||
| Cost of goods sold | $472 | $408 |
| Selling and general expenses | 176 | 156 |
| Interest | 28 | 22 |
| $676 | $586 | |
| Income before income taxes and extraordinary items | $35 | $68 |
| Income taxes | -15 | -30 |
| Income before extraordinary items | $20 | $38 |
| Extraordinary items- fire | $18 | |
| Net income | $20 | $20 |
Solution
SOLUTION
Times Interest Earned = Recurring Earnings Before Interest, Tax, Minority Income and Equity Earnings / Interest Expense, Including Capitalized Interest
The ability of the firm to cover its interest has declined substantially due both to rising interest and falling income.
The statement by the SOF Antiques representative is false. The only reason that net income was at $20,000 in 2005 was because of the extraordinary fire loss. Recurring profits dropped from $38,000 to $20,000.
| 2006 | 2005 | |
| Income before income taxes and extraordinary items | 35 | 68 |
| Plus interest expense | 28 | 22 |
| Income (A) | 63 | 90 |
| Interest expense (B) | 28 | 22 |
| Times interest earned (A/B) | 2.25 times | 4.09 times |
