P 10-8 The balance sheet for December 31, 2011, income statement for the year ended December 31, 2011, and the statement of cash flows for the year ended December 31, 2011, of Bernett Company are shown in the following balance sheet.

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 2011.

BERNETT COMPANY
Balance Sheet
December 31, 2011 and 2010
2011	2010
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 12/31/11)	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, 2011
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, 2011
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 2011:

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 2011:

1. Times interest earned

2. Debt ratio

3. Operating cash flow/total debt

d. Compute the following profitability ratios for 2011:

1. Return on assets (using average assets)

2. Return on common equity (using average common equity)

e. Compute the following investor ratio for 2011: 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.