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.
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BERNETT COMPANY |
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2009 |
2008 |
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|
Assets |
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Cash |
$5,000 |
$28,000 |
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Accounts receivable, net |
92,000 |
70,000 |
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Inventory |
130,000 |
85,000 |
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Prepaid expenses |
4,000 |
6,000 |
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Land |
30,000 |
10,000 |
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Building |
170,000 |
30,000 |
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Accumulated depreciation |
20,000 |
10,000 |
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Total assets |
$411,000 |
$219,000 |
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Liabilities and Stockholders’ Equity |
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Accounts payable |
$49,000 |
$44,000 |
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Income taxes payable |
5,000 |
4,000 |
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Accrued liabilities |
6,000 |
5,000 |
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Bonds payable (current $10,000 at 12/31/09) |
175,000 |
20,000 |
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Common stock |
106,000 |
96,000 |
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Retained earnings |
70,000 |
50,000 |
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Total liabilities and stockholders’ equity |
$411,000 |
$219,000 |
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BERNETT COMPANY |
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Sales |
$500,000 |
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Less expenses: |
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Cost of goods sold (includes depreciation of $4,000) |
310,000 |
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Selling and administrative expenses (includes depreciation of $6,000) |
80,000 |
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Interest expense |
11,000 |
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Total expenses |
401,000 |
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Income before taxes |
99,000 |
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Income tax expense |
30,000 |
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Net income |
$69,000 |
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BERNETT COMPANY |
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Net cash flow from operating activities: |
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Net income |
$69,000 |
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Noncash expenses, revenues, losses, and gains included in income: |
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Depreciation |
10,000 |
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Increase in receivables |
22,000 |
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Increase in inventory |
45,000 |
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Decrease in prepaid expenses |
2,000 |
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Increase in accounts payable |
5,000 |
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Increase in income taxes payable |
1,000 |
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Increase in accrued liabilities |
1,000 |
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Net cash flow from operating activities |
$21,000 |
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Cash flows from investing activities: |
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Increase in land |
($20,000) |
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Increase in buildings |
140,000 |
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Net cash used by investing activities |
160,000 |
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Cash flows from financing activities: |
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Bond payable increase |
$155,000 |
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Common stock increase |
10,000 |
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Cash dividends paid |
49,000 |
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Net cash provided by financing activities |
116,000 |
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Net decrease in cash |
($23,000) |
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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.