P13-4A The following financial information is for Inca Company.

Balance Sheets
December 31
Assets 2007 2006
Cash $ 70,000 $ 65,000
Short-term investments 55,000 40,000
Receivables 104,000 90,000
Inventories 230,000 125,000
Prepaid expenses 25,000 23,000
Land 130,000 130,000
Building and equipment (net) 260,000 175,000
Total assets $874,000 $648,000

Liabilities and Stockholders’ Equity
Notes payable $170,000 $100,000
Accounts payable 65,000 42,000
Accrued liabilities 40,000 40,000
Bonds payable, due 2009 250,000 150,000
Common stock, $10 par 200,000 200,000
Retained earnings 149,000 116,000
Total liabilities and stockholders’ equity $874,000 $648,000
Income Statements
For the Years Ended December 31

2007 2006
Sales $880,000 $790,000
Cost of goods sold 640,000 575,000
Gross profit 240,000 215,000
Operating expenses 192,000 170,000
Net income $ 48,000 $ 45,000
Additional information:
1. Inventory at the beginning of 2006 was $115,000.
2. Receivables (net) at the beginning of 2006 were $88,000.
3. Total assets at the beginning of 2006 were $630,000.
4. No common stock transactions occurred during 2006 or 2007.
5. All sales were on account.
(a) Indicate, by using ratios, the change in liquidity and profitability of Inca Company from 2006 to 2007. (Note: Not all profitability ratios can be computed nor can cashbasis ratios 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, 2007, and (2) as of December 31, 2008, after giving effect to the situation. Net income for 2008 was $40,000. Total assets on December 31, 2008, were $900,000.

Situation Ratio
1. 18,000 shares of common stock were Return on common stockholders’
sold at par on July 1, 2008. equity
2. All of the notes payable were paid in 2008. Debt to total assets
3. The market price of common stock was Price-earnings
$9 and $12 on December 31, 2007 and 2008, respectively.

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