Zaro Company€™s balance sheets for December 31, 2011 and 2010, income state-ment for the year ended December 31, 2011, and the statement of cash flows for the year ended December 31, 2011, 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 bal-ance. He notes that business was down slightly in 2011.

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
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. 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 cashbalance.

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ZARO COMPANY Balance Sheet December 31, 2011 and 2010 2011 2010 Assets Cash Accounts receiva ble, net In ventory Prepaid expenses Land Building and equipment Accumulated depreciation Total assets Liabilities and Stockholders' Equity Accounts payable Income taxes payable Accrued liabilities Bonds payable (current $20,000 at 12/31/11) Common stock Retained earnings Total liabilities and stockholders' equity S 30,000 75,000 90,000 3,000 25,000 122,000 (92,000) $253,000 S 15,000 87,000 105,000 2,000 25,000 120,000 (80,000) $274,000 S 25,500 2,500 5,000 90,000 85,000 45,000 S 32,000 3,000 5,000 95,000 85,000 54,000 $274,000