Financial information for Ernie Bishop Company is presented below.
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Ernie Bishop Company Balance Sheets December 31
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Assets
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2013
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2012
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Cash
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$70,000
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$65,000
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Short-term investments
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52,000
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40,000
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Receivables (net)
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98,000
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80,000
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Inventory
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125,000
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135,000
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Prepaid expenses
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29,000
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23,000
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Land
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130,000
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130,000
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Building and equipment (net)
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168,000
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175,000
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$672,000
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$648,000
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Liabilities and Stockholders' Equity
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Notes payable
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$100,000
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$100,000
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Accounts payable
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48,000
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42,000
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Accrued liabilities
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44,000
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40,000
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Bonds payable, due 2014
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150,000
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150,000
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Common stock, $10 par
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200,000
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200,000
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Retained earnings
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130,000
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116,000
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$672,000
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$648,000
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Ernie Bishop Company Income Statement
For the Years Ended December 31
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2013
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2012
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Net sales
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$858,000
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$798,000
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Cost of goods sold
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611,000
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575,000
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Gross profit
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247,000
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223,000
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Operating expenses
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204,500
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181,000
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Net income
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$ 42,500
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$ 42,000
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Additional information:
1. Inventory at the beginning of 2012 was $118,000.
2. Total assets at the beginning of 2012 were $632,000.
3. No common stock transactions occurred during 2012 or 2013.
4. All sales were on account.
5. Receivables (net) at the beginning of 2012 were $88,000.
Instructions
(a) Indicate, by using ratios, the change in liquidity and profitability of Ernie Bishop Company from 2012 to 2013. (Note: Not all profitability ratios can be computed.)
(b) Given below are three independent situations and a ratio that may be affected. For each situation, compute the affected ratio (1) as of December 31, 2013, and (2) as of December 31, 2014, after giving effect to the situation. Net income for 2014 was $50,000. Total assets on December 31, 2014, were $700,000.
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Situation
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Ratio
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(1) 18,000 shares of common stock were sold equity
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Return on common stockholders' at par on July 1, 2014.
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(2) All of the notes payable were paid in 2014.
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Debt to total assets The only change in liabilities was that the notes payable were paid.
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(3) Market price of common stock was $9
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Price-earnings ratio on December 31, 2013, and $12.50 on December 31, 2014.
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