Financial information for Ernie Bishop Company is presented below. - 14025

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Problem 18-4A

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Financial information for Ernie Bishop Company is presented below.

ERNIE BISHOP COMPANY
Balance Sheets
December 31

Assets

 

2013

 

2012

Cash

 

$ 70,000

 

$ 65,000

Short-term investments

 

52,000

 

40,000

Receivables (net)

 

98,000

 

80,000

Inventory

 

125,000

 

135,000

Prepaid expenses

 

29,000

 

23,000

Land

 

130,000

 

130,000

Building and equipment (net)

 

180,000

 

175,000

   

$684,000

 

$648,000

Liabilities and Stockholders’ Equity

       

Notes payable

 

$100,000

 

100,000

Accounts payable

 

48,000

 

42,000

Accrued liabilities

 

50,000

 

40,000

Bonds payable, due 2014

 

150,000

 

150,000

Common stock, $10 par

 

200,000

 

200,000

Retained earnings

 

136,000

 

116,000

   

$684,000

 

648,000

 

ERNIE BISHOP COMPANY
Income Statement
For the Years Ended December 31

   

2013

 

2012

Net sales

 

$850,000

 

$790,000

Cost of goods sold

 

620,000

 

575,000

Gross profit

 

230,000

 

215,000

Operating expenses

 

187,000

 

173,000

Net income

 

$ 43,000

 

$ 42,000


Additional information:

1.

 

Inventory at the beginning of 2012 was $118,000.

2.

 

Receivables (net) at the beginning of 2012 were $88,000.

3.

 

Total assets at the beginning of 2012 were $630,000.

4.

 

No common stock transactions occurred during 2012 or 2013.

5.

 

All sales were on account.



(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.) (Round Earnings per share to 2 decimal places, e.g. 1.65, and all others to 1 decimal place, e.g. 6.8 or 6.8% .)

(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. (Round answers to 1 decimal place, e.g. 6.8 or 6.8% .)

Situation

 

Ratio

(1)

 

18,000 shares of common stock were sold at par on July 1, 2014.

 

Return on common stockholders’ equity

(2)

 

All of the notes payable were paid in 2014. The only change in liabilities was that the notes payable were paid.

 

Debt to total assets

(3)

 

Market price of common stock was $9 on December 31, 2013, and $12.80 on December 31, 2014.

 

Price-earnings ratio

 

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