The following financial information is for Inca Company.

on overall liquidity and profitability.

(SO 6)

INCA COMPANY Balance Sheets December 31 Assets _2007on ernsovem Cash $ 70,000 $ 65,000 Short-term investments 55,000 40,000 Receivables 104,000 90,000 Inventories 230,000 125,000 Prepaid expenses 25,000 23,000 Land 130,000 130,000 Building and equipment (net) 260,000 175,000 Total assets $874,000 $648,000 Liabilities and Stockholders’ Equity Notes payable $170,000 $100,000 Accounts payable 65,000 42,000 Accrued liabilities 40,000 40,000 Bonds payable, due 2009 250,000 150,000 Common stock, $10 par 200,000 200,000 Retained earnings 149,000 116,000 Total liabilities and stockholders’ equity $874,000 $648,000 INCA COMPANY Income Statements For the Years Ended December 31 2007 Sales $880,000 Cost of goods sold 640,000 Gross profit 240,000 Operating expenses 192,000 Net income $ 48,000 Additional information: 1. Inventory at the beginning of 2006 was $115,000. 2. Receivables (net) at the beginning of 2006 were $88,000. 3. Total assets at the beginning of 2006 were $630,000. 4. No common stock transactions occurred during 2006 or 2007. 5. All sales were on account.

Instructions

(a) Indicate, by using ratios, the change in liquidity and profitability of Inca Company from 2006 to 2007. (Note: Not all profitability ratios can be computed nor can cashbasis ratios 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, 2007, and (2) as of December 31, 2008, after giving effect to the situation. Net income for 2008 was

$40,000. Total assets on December 31, 2008, were $900,000.

2006

$790,000 575,000 215,000 170,000

$ 45,000 Situation Ratio 1. 18,000 shares of common stock were Return on common stockholders’

sold at par on July 1, 2008. equity 2. All of the notes payable were paid in 2008. Debt to total assets 3. The market price of common stock was Price-earnings

$9 and $12 on December 31, 2007 and 2008, respectively.