Exercise - The balance sheet for December 31, 2007, income statement for the year ended December 31, 2007, and the statement of cash flows for the year ended December 31, 2007, of Bernett Company are shown below and on the following page.
The president of Bernett Company cannot understand why Bernett is having trouble paying current obligations. He notes that business has been very good, as sales have more than doubled, and the company achieved a profit of $69,000 in 2007.
BERNETT COMPANY Balance Sheet December 31, 2007 and 2006
2007 2006
Assets
Cash $ 5,000 $ 28,000
Accounts receivable, net 92,000 70,000
Inventory 130,000 85,000
Prepaid expenses 4,000 6,000
Land 30,000 10,000
Building 170,000 30,000
Accumulated depreciation (20,000) (10,000)
Total assets $411,000 $219,000
Liabilities and Stockholders' Equity
Accounts payable $ 49,000 $ 44,000
Income taxes payable 5,000 4,000
Accrued liabilities 6,000 5,000
Bonds payable (current $10,000 at 12/31/07) 175,000 20,000
Common stock 106,000 96,000
Retained earnings 70,000 50,000
Total liabilities and stockholders' equity $411,000 $219,000
BERNETT COMPANY Income Statement For Year Ended December 31, 2007
Sales $500,000
Less expenses:
Cost of goods sold (includes depreciation of $4,000) 310,000
Selling and administrative expenses (includes depreciation of $6,000) 80,000
Interest expense 11,000
Total expenses 401,000
Income before taxes 99,000
Income tax expense 30,000
Net income $ 69,000
BERNETT COMPANY Statement of Cash Flows For Year Ended December 31, 2007
Net cash flow from operating activities:
Net income $ 69,000
Noncash expenses, revenues, losses, and gains
included in income:
Depreciation 10,000
Increase in receivables (22,000)
Increase in inventory (45,000)
Decrease in prepaid expenses 2,000
Increase in accounts payable 5,000
Increase in income taxes payable 1,000
Increase in accrued liabilities 1,000
Net cash flow from operating activities $ 21,000
Cash flows from investing activities:
Increase in land $ (20,000)
Increase in buildings (140,000)
Net cash used by investing activities (160,000)
Cash flows from financing activities:
Bond payable increase $ 155,000
Common stock increase 10,000
Cash dividends paid (49,000)
Net cash provided by financing activities 116,000
Net decrease in cash $ (23,000)
Required -
a. Comment on the statement of cash flows.
b. Compute the following liquidity ratios for 2007:
1. Current ratio
2. Acid-test ratio
3. Operating cash flow/current maturities of long-term debt and current notes payable
4. Cash ratio
c. Compute the following debt ratios for 2007:
1. Times interest earned
2. Debt ratio
3. Operating cash flow/total debt
d. Compute the following profitability ratios for 2007:
1. Return on assets (using average assets)
2. Return on common equity (using average common equity)
e. Compute the following investor ratio for 2007: Operating cash flow/cash dividends.
f. Give your opinion as to the liquidity of Bernett.
g. Give your opinion as to the debt position of Bernett.
h. Give your opinion as to the profitability of Bernett.
i. Give your opinion as to the investor ratio.
j. Give your opinion of the alternatives Bernett has in order to ensure that it can pay bills as they come due.