Use the information in E5.17 for Dropafix Inc.

Instructions

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

b. Calculate Dropafix’s current cash debt coverage ratio for 2020.

c. Calculate Dropafix’s cash debt coverage ratio for 2020.

d. Calculate Dropafix’s times interest earned ratio for 2020.

e. Based on the analyses in parts (a) through (d), comment on Dropafix’s liquidity, financial flexibility, and ability to repay current and all liabilities from its operations and ability to meet interest payments as they come due.

f. Digging Deeper Looking at the statement of income, the statement of financial position, and the statement of cash flows, provide one recommendation that could improve Dropafix’s liquidity, financial flexibility, and ability to repay current and all liabilities from its operations.

E5.17

The comparative statement of financial position of Dropafix Inc. as at June 30, 2020, and a statement of comprehensive income for the 2020 fiscal year follow:

                                 Dropafix Inc.
              Statement of Comprehensive Income
                   For the Year Ended June 30, 2020
Net sales ................................................................. $323,000
Cost of goods sold ................................................... 175,000
Gross profit ............................................................... 148,000
Operating expenses ................................................. 120,000
Income from operations ............................................ 28,000
Interest expense ........................................................... 9,000
Income before income tax ........................................ 19,000
Income tax .................................................................... 6,000
Net income ................................................................. 13,000
Other comprehensive income
Unrealized gain or loss—OCI ...................................... 2,000
Comprehensive income .......................................... $ 15,000

Additional information:

1. Dropafix follows IFRS. Assume that interest is treated as an operating activity for purposes of the statement of cash flows.

2. Operating expenses include $10,000 in depreciation expense.

3. There were no disposals of equipment during the year.

4. Common shares were issued for cash.

5. During the year, Dropafix acquired $8,000 of equipment in exchange for long-term notes payable.

Dropafix Inc. Statement of Financial Position June 30, 2020 June 30 Assets 2020 2019 Cash $ 20,000 $ 38,000 Accounts receivable 86,000 74,000 Inventory Prepaid expenses 103,000 102,000 2,000 6,000 FV-OCI investments 47,000 45,000 Equipment Accumulated depreciation-equipment 173,000 159,000 (35,000) (25,000) Total $396,000 $399,000