ERNIE BISHOP COMPANY Income Statement For the Years Ended December 31 2013 2012 Net sales $850,000 $790,000 Cost of goods sold 620,000 575,000 230,000 215,000 Gross profit Operating expenses 187,000 173,000 Net income $ 43,000 $ 42,000 Additional information: 1. Inventory at the beginning of 2012 was $118,000. 2. Total assets at the beginning of 2012 were $630,000. 3. No common stock transactions occurred during 2012 or 2013. 4. All sales were on account. Instructions (a) Indicate, by using ratios, the change in liquidity and profitability of Ernie Bishop Company from 2012 to 2013. (Note: Not all profitability ratios can 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, 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. Situation Ratio (1) 18,000 shares of common stock were sold at par on July 1, 2014. Return on common stockholders' equity Debt to total assets (2) All of the notes payable were paid in 2014. The only change in liabilities was that the notes payable were paid. (3) Market price of common stock was $9 on December 31, 2013, and $12.80 on December 31, 2014. Price-earnings ratio 18-5 Financial information for Ernie Bishop Company is presented below. ERNIE BISHOP COMPANY Balance Sheets December 31 Assets 2013 2012 Cash $ 70,000 $ 65,000 Short-term investments 40,000 52,000 98,000 Receivables (net) 80,000 125,000 135,000 Inventory Prepaid expenses Land 29,000 23,000 130,000 130,000 180,000 175,000 $684,000 $648,000 Building and equipment (net) $100,000 $100,000 48,000 Liabilities and Stockholders' Equity Notes payable Accounts payable Accrued liabilities Bonds payable, due 2014 Common stock, $10 par Retained earnings 42,000 40,000 50,000 150,000 150,000 200,000 200,000 136,000 116,000 $684,000 $648,000 ERNIE BISHOP COMPANY