Morksen Corp. has enjoyed modest success in penetrating the personal electronic devices market since it began operations a few years ago. A new line of devices introduced recently has been well received by customers. However, the company president, who is knowledgeable about electronics but not in accounting, is concerned about the future of the company.

Although the company has a line of credit with the local bank, it currently needs cash to continue operations. The bank wants more information before it extends the company's credit line. The president has asked you, as the company's chief accountant, to evaluate the company's performance by using appropriate financial statement analysis, and to recommend possible courses of action for the company. In particular, the president wants to know how the company can obtain additional cash. Summary financial statements for the past three years are available below.

\section*{Required:}

1. Evaluate the company's performance and its financial condition for the past two years. Select six appropriate ratios to analyze the company's profitability, liquidity, and solvency for 2010 and 2011, and explain to the company's president the meaning of each ratio you calculate.

2. Based on your analysis of the ratios that you computed in (1), what recommendation would you make to the president for obtaining additional cash?

Transcribed Image Text:

MORKSEN CORP. Consolidated Income Statements For the Years Ended December 31 (in thousands of dollars) 2011 2010 2009 Sales $32,000 $28,000 $23,400 Cost of sales 25,000 21,500 18,000 Gross profit 7,000 6,500 5,400 Operating expenses before interest and income taxes 4,000 3,700 3,310 Interest expense 890 610 0 Profit before income taxes 2,110 2,190 2,090 Income tax expense 950 1,020 970 Profit $ 1,160 $ 1,170 $ 1,120