Financial information for Ernie Bishop Company is presented below.

Additional information:

1. Inventory at the beginning of 2019 was €118,000.

2. Total assets at the beginning of 2019 were €632,000.

3. No ordinary share transactions occurred during 2019 or 2020.

4. All sales were on account.

5. Accounts receivable (net) at the beginning of 2019 were €88,000.

6. Notes payable are classified as a current liability.

Instructions
a. Indicate, by using ratios, the change in liquidity and profitability of Ernie Bishop Company from 2019 to 2020. (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, 2020, and (2) as of December 31, 2021, after giving effect to the situation.

                     Situation                                                                                                 Ratio
1. 18,000 ordinary shares were sold                                                     Return on ordinary shareholders’
at par on July 1, 2021. Net income for                                                   equity
2021 was €50,000.
2. All of the notes payable were paid in 2021.                                     Debt to assets ratio
The only change in liabilities was that
the notes payable were paid. Total assets
on December 31, 2021, were €700,000.
3. Market price of ordinary shares was €9                                           Price-earnings ratio
on December 31, 2020, and €12.50 on
December 31, 2021. Net income for 2021 was €50,000.

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Ernie Bishop Company Statements of Financial Position December 31 Assets 2020 2019 €130,000 Land €130,000 168,000 29,000 125,000 Building and equipment (net) Prepaid expenses Inventory Accounts receivable (net) 175,000 23,000 135,000 98,000 80,000 Short-term investments 52,000 40,000 Cash 70,000 65,000 €648,000 €672,000 Equity and Liabilities Share capital-ordinary, €10 par Retained earnings €200,000 130,000 €200,000 116,000 Bonds payable, due 2023 Notes payable Accounts payable 150,000 150,000 100,000 100,000 48,000 44,000 42,000 Accrued liabilities 40,000 €648,000 €672,000 Ernie Bishop Company Income Statement For the Years Ended December 31 2020 2019 €798,000 575,000 Net sales €858,000 Cost of goods sold 611,000 Gross profit Operating expenses 247,000 223,000 204,500 181,000 Net income € 42,500 € 42,000