Problem 14-4A
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 | $ 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) | 168,000 | 175,000 | ||
| $672,000 | $648,000 | |||
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Liabilities and Stockholders’ Equity
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| Notes payable | $100,000 | 100,000 | ||
| Accounts payable | 48,000 | 42,000 | ||
| Accrued liabilities | 44,000 | 40,000 | ||
| Bonds payable, due 2016 | 150,000 | 150,000 | ||
| Common stock, $10 par | 200,000 | 200,000 | ||
| Retained earnings | 130,000 | 116,000 | ||
| $672,000 | $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 | $858,000 | $798,000 | ||
| Cost of goods sold | 611,000 | 575,000 | ||
| Gross profit | 247,000 | 223,000 | ||
| Operating expenses | 204,500 | 181,000 | ||
| Net income | $ 42,500 | $ 42,000 | ||
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. |
(a) Indicate, by using ratios, the change in liquidity and profitability of Ernie Bishop Company from 2012 to 2013. (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% .)
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2012
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2013
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Change
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LIQUIDITY
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| Current |  |
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| Acid-test | |
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| Receivables turnover | |
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| Inventory turnover | |
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PROFITABILITY
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| Profit margin | |
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| Asset turnover | |
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| Return on assets | |
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| Earnings per share | $ |
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(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 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 $12.50 on December 31, 2014. | Price-earnings ratio | ||
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2013
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2014
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Change
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| Return on common stockholders’ equity | |
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| Debt to total assets | |
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| Price-earnings ratio | |
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