Financial information for Ernie Bishop Company is presented below.


Additional information:
1. Inventory at the beginning of 2012 was $118,000.
2. Total assets at the beginning of 2012 were $632,000.
3. No common stock transactions occurred during 2012 or 2013.
4. All sales were on account.
5. Receivables (net) at the beginning of 2012 were $88,000.
Instructions
(a) Indicate, by using ratios, the change in liquidity and profitability of Ernie Bishop Company from 2012 to 2013.
(b) Given below are three independent situations and a ratio that may be affected. For each situation, compute the affected ratio (1) as of December 31, 2013, and (2) as of December 31, 2014, after giving effect to the situation. Net income for 2014 was $50,000. Total assets on December 31, 2014, were $700,000.
Situation Ratio
(1) 18,000 shares of common stock were sold Return on common stockholders’
at par on July 1, 2014. equity
(2) All of the notes payable were paid in 2014. Debt to total assets
The only change in liabilities was that
the notes payable were paid.
(3) Market price of common stock was $9 Price-earnings ratio
on December 31, 2013, and $12.50 on
December 31,2014.
$1.99

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March 22, 2012

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