The following information is taken from the financial statements of Knights, Inc.

From the balance sheet:
Cash		$ 30,000
Accounts receivable		150,000
Inventory		200,000
Plant assets (net of accumulated depreciation)		500,000
Current liabilities		150,000
Total stockholders equity		300,000
Total assets		1,000,000
From the income statement:
Net sales		$1,500,000
Cost of goods sold		1,080,000
Operating expenses		315,000
Interest expense		84,000
Income tax expense		6,000
Net income		15,000
From the statement of cash flows:
Net cash provided by operating activities (including interest paid of $79,000)		$ 40,000
Net cash used in investing activities		(46,000)
Financing activities:
Amounts borrowed	$ 50,000
Repayment of amounts borrowed	(14,000)
Dividends paid	(20,000)
Net cash provided by financing activities		16,000
Net increase in cash during the year		$ 10,000

Instructions

Explain how the interest expense shown in the income statement could be $84,000, when the interest payment appearing in the statement of cash flows is only $79,000.

Compute the following (round to one decimal place):

Current ratio

Quick ratio

Working capital

Debt ratio

Comment on these measurements and evaluate Knights, Inc.s short-term debt-paying ability.

Compute the following ratios (assume that the year-end amounts of total assets and total stockholders equity also represent the average amounts throughout the year).

Return on assets

Return on equity

Comment on the companys performance under these measurements. Explain why the return on assets and return on equity are so different.

Discuss (1) the apparent safety of long-term creditors claims and (2) the prospects for Knights, Inc., continuing its dividend payments at the present level.