Presented here are a statement of income and retained earnings and comparative balance sheets for Gallagher, Inc., which operates a national chain of sporting goods stores.

Gallagher, Inc.

Statement of Income and Retained Earnings

For the Year Ended December 31, 2010

(all amounts in thousands of dollars)

Net sales ................$48,000

Cost of goods sold ............ 36,000

Gross profit ............... $ 12,000

Selling, general, and administrative expense .. 6,000

Operating income ..............$ 6,000

Interest expense .............. 280

Income before tax ..............$ 5,720

Income tax expense ............ 2,280

Net income ................$ 3,440

Preferred dividends ............. 100

Income available to common ..........$ 3,340

Common dividends ............. 500

To retained earnings ............$ 2,840

Retained earnings, 1/1 ............ 12,000

Retained earnings, 12/31 ........... $ 14,840

Required

1. Prepare a statement of cash flows for Gallagher, Inc., for the year ended December 31, 2010, using the indirect method in the Operating Activities section of the statement.

2. Gallagher’s management is concerned with its short-term liquidity and its solvency over the long run. To help management evaluate these, compute the following ratios, rounding all answers to the nearest one-tenth of a percent:

a. Current ratio

b. Acid-test ratio

c. Cash flow from operations to current liabilities ratio

d. Accounts receivable turnover ratio

e. Number of days’ sales in receivables

f. Inventory turnover ratio

g. Number of days’ sales in inventory

h. Debt-to-equity ratio

i. Debt service coverage ratio

j. Cash flow from operations to capital expenditures ratio

3. Comment on Gallagher’s liquidity and its solvency. What additional information do you need to fully evaluate the company?

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Gallagher, Inc. Comparative Balance Sheets December 31, 2010 and 2009 (all amounts in thousands of dollars) December 31 2010 2009 $ 840 $ 2,700 9,000 Cash Accounts receivable 12,500 Inventory Prepaid insurance 8,000 5,500 400 $ 17,600 $ 4,000 100 $21,440 $ 4,000 12,000 Total current assets Land Buildings and equipment Accumulated depreciation Total long-term assets 9,000 (3,700) $12,300 $33,740 $ 7,300 (3,000) $ 10,000 $27,600 Total assets $ 5,000 Accounts payable Taxes payable Notes payable Current portion of bonds 4,600 2,400 4,200 1,600 200 200 $14,500 1,400 $15,900 $ 1,000 $ 11,000 1,600 $ 12,600 $ 1,000 Total current liabilities Bonds payable Total liabilities Preferred stock, $5 par Common stock, $1 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 2,000 2,000 14,840 $ 17,840 $33,740 12,000 $ 15,000 $ 27,600