Question: Financial information for Messersmith Company is presented below

Financial information for Messersmith Company is presented below.

Additional information:
1. Inventory at the beginning of 2014 was $118,000.
2. Total assets at the beginning of 2014 were $630,000.
3. No common stock transactions occurred during 2014 or 2015.
4. All sales were on account. Accounts receivable, net at the beginning of 2014, were $88,000.
5. Notes payable are classified as current liabilities.

(a) Indicate, by using ratios, the change in liquidity and profitability of Messersmith Company from 2014 to 2015. (Note: Not all profitability ratios can be computed.)
(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, 2015, and (2) as of December 31, 2016, after giving effect to the situation. Net income for 2016 was $50,000. Total assets on December 31, 2016, were $700,000.
Situation Ratio___________
(1) 18,000 shares of common stock were sold Return on common stockholders’
at par on July 1, 2016. equity
(2) All of the notes payable were paid in 2016. Debt to assets ratio
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, 2015, and $12.80 on
December 31,2016.
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  • CreatedJanuary 30, 2014
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