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Illustration 18-24 Ratio Analysis 11. Payout Ratio Measures the percentage of earnings distributed in the form of cash dividends. Profitability Ratios SO 5 SO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Solvency Ratios Solvency ratios measure the ability of a company to survive over a long period of time. Debt to Total Assets and Times Interest Earned are two ratios that provide information about debt-paying ability. Ratio Analysis Illustration 18-25 Ratio Analysis 12. Debt to Total Assets Ratio Measures the percentage of the total assets that creditors provide. SO 5 Solvency Ratios Illustration 18-26 Ratio Analysis 13. Times Interest Earned Provides an indication of the company’s ability to meet interest payments as they come due. SO 5 Solvency Ratios Illustration 18-27 Ratio Analysis SO 5 Summary of Ratios Illustration 18-27 Summary of Ratios SO 5 SO 6 Understand the concept of earning power, and how irregular items are presented. Earning power means the normal level of income to be obtained in the future. “Irregular” items are separately identified on the income statement. Two types are: Discontinued operations. Extraordinary items. “Irregular” items are reported net of income taxes. Earning Power and Irregular Items Disposal of a significant component of a business. Report the income (loss) from discontinued operations in two parts: income (loss) from operations (net of tax) and gain (loss) on disposal (net of tax). SO 6 Understand the concept of earning power, and how irregular items are presented. Earning Power and Irregular Items Discontinued Operations Illustration: During 2012 BD Inc. has income before income taxes of $79,000,000. During 2012, BD discontinued and sold its unprofitable chemical division. The loss in 2012 from chemical operations (net of $135,000 taxes) was $315,000. The loss on disposal of the chemical division (net of $81,000 taxes) was $189,000. Assuming a 30% tax rate on…