Formulas

• Accounting equation: Assets = Liabilities and Owner's Equity
• Current ratio: current assets/current liabilities
• Acid test ratio: (current assets - inventory)/current liabilities
• Return on equity: net income/total shareholder's equity
• Times interest earned: earnings before interest and taxes/interest expense
• Debt to equity: total liabilities/shareholder's equity
• Profit margin: net income/net sales (or sales if net sales are not available)
• Gross margin: gross profit/sales

• Sources of Cash (Year Over Year) Assets - (decrease) Liabilities + (increase) Owner's Equity + (increase)
• Uses of Cash (Year Over Year) Assets + (increase) Liabilities - (decrease) Owner's Equity - (decrease)

QUESTION

Use the following income statement information for de la Vega Medical Devices Corp. to calculate Times Interest Earned for 2018 and 2019. If the industry average is 9.2, please describe why the Times Interest Earned ratio is improving or getting worse from 2018 through 2019.

	2019	2018
Sales	500	540
Less: Cost of Goods Sold	250	200
GROSS PROFIT	250	340
Less: Operating Expenses	98	70
EARNINGS BEFORE INTEREST & TAXES	152	270
Less: Interest Expense	52	82
EARNINGS BEFORE TAXES	100	188
Less: Taxes	21	66
NET INCOME	79	122