Use the information in E5-17 for Dropafix Inc.
In E5-17
The comparative statement of financial position of Dropafix Inc. as at June 30, 2017, and a statement of comprehensive income for the 2017 fiscal year follow:

Additional information:
1. Dropafix follows IFRS. Assume that interest is treated as an operating activity for purposes of the statement of cash flows.
2. Operating expenses include $10,000 in depreciation expense.
3. There were no disposals of equipment during the year.
4. Common shares were issued for cash.
5. During the year, Dropafix acquired $8,000 of equipment in exchange for long-term notes payable.
Instructions
(a) Calculate the current and acid test ratios for 2016 and 2017.
(b) Calculate Dropafix's current cash debt coverage ratio for 2017.
(c) Calculate Dropafix's cash debt coverage ratio for 2017.
(d) Calculate Dropafix's times interest earned ratio for 2017.
(e) Based on the analyses in (a) through (d), comment on Dropafix's liquidity, financial flexibility, and ability to repay current and all liabilities from its operations and ability to meet interest payments as they come due.
(f) Looking at the statement of income, the statement of financial position, and the statement of cash flows, provide one recommendation that could improve Dropafix's liquidity, financial flexibility, and ability to repay current and all liabilities from its operations.

Transcribed Image Text:

DROPAFIX INC. Statement of Financial Position June 30, 2017 Assets Cash Accounts receivable Inventory Prepaid expenses Fair Value-OCI Investments Equipment Accumulated depreciation-equipment 2017 $ 20,000 86,000 103,000 2016 $ 38,000 74,000 102,000 2,000 6,000 47,000 173,000 (35,000) $396,000 45,000 159,000 (25,000) $399,000 Total Liabilities and Shareholders' Equity Accounts payable Income taxes payable Dividends payable Long-term notes payable Common shares Retained earnings Accumulated other comprehensive income $115,000 2,000 5,000 84,000 31,000 148,000 11,000 $396,000 $100,000 3,000 0 119,000 24,000 144,000 9,000 $399,000 Total DROPAFIX INC. Statement of Comprehensive Income For the Year Ended June 30, 2017 Net sales Cost of goods sold Gross proft Operating expenses Income from operations Interest expense Income before income taxes Income taxes Net income Other comprehensive income $323,000 175,000 148,000 120,000 28,000 9,000 19,000 6,000 13,000 Unrealized gain on FV-OCI investments Comprehensive income 2,000 $15,000