Use the information in E5.14 for Carmichael Industries.

Instructions

a. Calculate the current and acid-test ratios for 2019 and 2020.

b. Calculate Carmichael?s current cash debt coverage ratio for 2020.

c. Based on the analyses in parts (a) and (b), comment on Carmichael?s liquidity and financial flexibility.

d. Calculate Carmichael?s payout ratio. From the company?s perspective, is the ratio too high? What would be a reasonable payout ratio?

E5.14

A comparative statement of financial position for Carmichael Industries Inc. follows:

Additional information:

1. Net income for the fiscal year ending December 31, 2020, was $129,000.

2. Cash dividends of $60,000 were declared and paid. Dividends paid are treated as financing activities.

3. Bonds payable amounting to $50,000 were retired through issuance of common shares.

4. Land was sold at a gain of $5,000.

5. No equipment was sold during the year.

Carmichael Industries Inc. Statement of Financial Position December 31, 2020 December 31 Assets 2020 2019 $ 21,000 $ 34,000 54,000 Cash Accounts receivable 104,000 Inventory Land 220,000 71,000 189,000 110,000 Equipment Accumulated depreciation-equipment 260,000 200,000 (69,000) (42,000) Total $607,000 $545,000 Liabilities and Shareholders' Equity Accounts payable Bonds payable $ 52,000 150,000 $ 59,000 200,000 Common shares 214,000 191,000 164,000 Retained earnings 122,000 Total $607,000 $545,000