PROBLEM 10–6 The income statement of Kimberly Corporation for the year ended December 31, Year 1, is re-

produced below:

KIMBERLY CORPORATION Consolidated Income Statement ($ thousands)

For Year Ended December 31, Year 1 Sales........................................................................................ $14,000 Undistributed income of less than 50%-owned affiliates ........ 300 Total revenue............................................................................ 14,300 Cost of goods sold.................................................................... $6,000 Selling and administrative expenses........................................ 2,000 Depreciation............................................................................. 600 Rental expense......................................................................... 500 Share of minority interest in consolidated income.................... 200 Interest expense ....................................................................... 400 (9,700)

Income before taxes ................................................................. 4,600 Income taxes Current ................................................................................ 900 Deferred............................................................................... 400 (1,300)

Net income ............................................................................... $ 3,300 Less dividends..........................................................................

Common stock ..................................................................... 300 Preferred stock..................................................................... 400 (700)

Earnings retained for the year.................................................. $ 2,600 Additional Information:

1. The following changes occurred in current assets and current liabilities for Year 1:

Current accounts Increase (decrease) Current accounts Increase (decrease)

Accounts receivable.................... $900 Notes payable to bank .................. $(200)

Inventories.................................. (800) Accounts payable ......................... 700 Dividend payable ........................ (100)

2. The effective tax rate is 40%.

3. Shares of minority interests in consolidated income do not have fixed charges.

4. Interest expense includes:

Interest incurred (except items below) ................... $600 Amortization of bond premium............................... (300)

Interest on capitalized leases ................................ 140 Interest incurred .................................................... 440 Less interest capitalized ........................................ (40)

Interest expense..................................................... $400 5. Amortization of previously capitalized interest (included in depreciation) is $60.
6. Interest implicit in operating lease rental payment (included in rental expense) is $120.
Required:

a. Compute the following earnings coverage ratios:
(1) Earnings to fixed charges.
(2) Cash flow to fixed charges.
(3) Earnings coverage of preferred dividends.

b. Analyze and interpret the earnings coverage ratios in (a).