Times-Interest-Earned Ratio

Smith and Sons, Inc. Income Statement
(in millions)	Current Year	Previous Year
Net sales	9,950	9,450
Cost of goods sold	(5,500)	(5,200)
Gross profit	4,450	4,250
Selling and administrative expenses	(2,800)	(2,700)
Income from operations	1,650	1,550
Interest expense	(300)	(250)
Income before income taxes	1,350	1,300
Income tax expense	(420)	(400)
Net income	930	900

Smith and Sons, Inc. Balance Sheet
(in millions)	Current Year	Previous Year
Assets
Current assets
Cash and cash equivalents	150	350
Accounts receivable	900	800
Inventory	450	600
Other current assets	400	250
Total current assets	1,900	2,000
Property, plant & equipment, net	2,650	2,550
Other assets	5,700	5,900
Total Assets	10,250	10,450
Liabilities and Stockholders' Equity
Current liabilities	2,950	2,850
Long-term liabilities	5,000	5,400
Total liabilities	7,950	8,250
Stockholders' equity-common	2,300	2,200
Total Liabilities and Stockholders' Equity	10,250	10,450

Calculate the times-interest-earned ratio for Smith & Sons, Inc., for each year.

Round answers to two decimal places.

Previous Year	Answer
Current Year	Answer

Did the companys ability to pay its current interest charges improve over the two years?

The decrease in ratio indicates that Smith & Son's ability to pay its current interest charges from operating income improved.

The increase in ratio indicates that Smith & Son's ability to pay its current interest charges from operating income declined.

The decrease in ratio indicates that Smith & Son's ability to pay its current interest charges from operating income declined.

The increase in ratio indicates that Smith & Son's ability to pay its current interest charges from operating income improved.