The following information is computed from Katy Inc.'s annual report for 2018. 2018 2017 Current assets $ 2,731,020 $ 2,364,916 Property and...

4.1 Ratings (719 Votes)

		2018	2017
1	Net sales	$ 33,410,599	$ 25,804,285
	Cost of goods sold	$ (30,168,715)	$ (23,159,745)
	Selling and administrative expense	$ (2,000,000)	$ (1,500,000)
	(A)	$ 1,241,884	$ 1,144,540
	Interest expense	$ 216,936	$ 39,456
	Capitalized interest	$ 30,000	$ 20,000
	Total Imterest (B)	$ 246,936	$ 59,456

	A/B	5.03 times	19.25 times


2	Debt Ratio =	Total Liabilities / Total Assets
		2018	2017

	Debt Ratio =	27%	20%
		(3748123/13968081)	(2236735/11137668)

3	Debt Equity Ratio =	Total Liabilities / Shareholders Equity

		37%	25%
		(3748123/10201958)	(2236735/8900933)

	In 2018, there was a rise in debt in Katy Inc. This included current liabilities, deferred taxes, and a new mortgage note payable.Hence there was a rise in the debt, debt/equity ratio.

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	2018	2017
Current assets	$ 2,731,020	$ 2,364,916
Property and equipment, net	10,960,286	8,516,833
Intangible assets, at cost less applicable
amortization	294,775	255,919
	$13,986,081	$11,137,668

Current liabilities	$ 3,168,123	$ 2,210,735
Deferred federal income taxes	160,000	26,000
Mortgage note payable	456,000	-
Stockholders' equity	10,201,958	8,900,933
	$13,986,081	$11,137,668

Net sales	$33,410,599	$25,804,285
Cost of goods sold	(30,168,715)	(23,159,745)
Selling and administrative expense	(2,000,000)	(1,500,000)
Interest expense	(216,936)	(39,456)
Income tax expense	(400,000 )	(300,000 )
Net income	$ 624,948	$ 805,084

a.	Based on the above data for both years, compute:
	1.	times interest earned
	2.	debt ratio
	3.	debt/equity ratio

b.	Comment on the firm's long-term borrowing ability based on theanalysis.