The balance sheet for December 31, 2009, income statement for the year ended December 31, 2009, and the statement of cash flows for the year ended December 31, 2009, 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 2009.

BERNETT COMPANY
  Balance Sheet
  December 31, 2009 and 2008

 

2009

2008

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 12/31/09)

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, 2009

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, 2009

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 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

3. Operating cash flow/total debt

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. Compute the following investor ratio for 2009: 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.

j. Give your opinion of the alternatives Bernett has in order to ensure that it can pay bills as they come due.