Financial Information

Financial information for Messersmith Company is presented below.

MESSERSMITH COMPANY Balance Sheets December 31

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Assets

2015

2014

Cash

$ 70,000

$ 65,000

Short-term investments

52,000

40,000

Accounts receivable (net)

98,000

80,000

Inventory

125,000

135,000

Prepaid expenses

29,000

23,000

Land

130,000

130,000

Building and equipment (net)

180,000

175,000

$684,000

$648,000

Liabilities and Stockholders Equity

Notes payable

$100,000

$100,000

Accounts payable

48,000

42,000

Accrued liabilities

50,000

40,000

Bonds payable, due 2016

150,000

150,000

Common stock, $10 par

200,000

200,000

Retained earnings

136,000

116,000

$684,000

$648,000

 

MESSERSMITH COMPANY Income Statement For the Years Ended December 31

 

2015

2014

Net sales

$850,000

$790,000

Cost of goods sold

620,000

575,000

Gross profit

230,000

215,000

Operating expenses

187,000

173,000

Net income

$ 43,000

$ 42,000

Additional information:

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

(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

18,000 shares of common stock were sold at par on July 1, 2016.

Return on common stockholders” equity

All of the notes payable were paid in 2016 The only change in liabilities was that the notes payable were paid.

Debt to assets ratio

Market price of common stock was $9 on December 31, 2015, and $12.80 on December 31, 2016.

Price-earnings ratio

 

 

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