Zaro Company’s balance sheets for December 31, 2009 and 2008, income statement for the year ended December 31, 2009, and the statement of cash flows for the year ended December 31, 2009, follow:
The president of Zaro Company cannot understand how the company was able to pay cash dividends that were greater than net income and at the same time increase the cash balance. He notes that business was down slightly in 2009.
Required
a. Comment on the statement of cash flows.
b. Compute the following liquidity ratios for 2009:
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 2009:
1. Times interest earned
2. Debt ratio
d. Compute the following profitability ratios for 2009:
1. Return on assets (using average assets)
2. Return on common equity (using average common equity)
e. Give your opinion as to the liquidity of Zaro.
f. Give your opinion as to the debt position of Zaro.
g. Give your opinion as to the profitability of Zaro.
h. Explain to the president how Zaro was able to pay cash dividends that were greater than net income and at the same time increase the cash balance.