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Phoniex University
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P 10-9.          Zaro Company’s balance sheets for December 31, 2007 and 2006, income statement for the year ended December 31, 2007, and the statement of cash flows for the year ended December 31, 2007, follow:
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 |
ZARO COMPANY Balance Sheet December 31, 2007 and  2006 |
 |
|
2007 |
 |
2006 |
|
Assets Cash |
 $  30,000 |
 |
 $ 15,000 |
Accounts receivable, net |
75,000 |
 |
87,000 |
Inventory |
90,000 |
 |
105,000 |
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 |
2007 |
 |
2006 |
Prepaid  expenses |
3,000 |
 |
2,000 |
Land |
25,000 |
 |
25,000 |
Building and equipment |
122,000 |
 |
120,000 |
Accumulated depreciation |
(92,000) |
 |
(80,000) |
Total assets |
$253,000 |
 |
$274,000 |
Liabilities and Stockholders’ Equity |
 |
 |
 |
Accounts payable |
$ Â 25,500 |
 |
$ 32,000 |
Income taxes payable |
2,500 |
 |
3,000 |
Accrued liabilities |
5,000 |
 |
5,000 |
Bonds payable (current $20,000 at 12/31/07) |
90,000 |
 |
95,000 |
Common stock |
85,000 |
 |
85,000 |
Retained earnings |
45,000 |
 |
54,000 |
Total liabilities and stockholders’ equity |
$253,000 |
 |
$274,000 |
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ZARO COMPANY
Income Statement
For Year Ended December 31, Â 2007
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Sales Less expense: Cost of goods sold (includes depreciation of   $5,000) |
$400,000 Â $280,000 |
Selling and administrative expenses (includes depreciation expenses of $7,000) |
78,000 |
Interest expense |
8,000 |
Total expenses |
$366,000 |
Income before taxes |
34,000 |
Income tax expense |
14,000 |
Net income |
$ Â 20,000 |
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ZARO COMPANY
Statement of Cash Flows
For Year Ended December 31, Â 2007
Net cash flow from operating  activities:
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Net income Noncash expenses, revenues, losses, and gains included in  income: Depreciation |
$ 20,000 Â Â 12,000 |
 |
Decrease in accounts receivable |
12,000 |
|
Decrease in inventory |
15,000 |
|
Increase in prepaid expenses |
(1,000) |
|
Decrease in accounts payable |
(6,500) |
|
Decrease in income taxes payable |
(500) |
|
Net cash flow from operating activities Cash flows from investing  activities: Increase in buildings and equipment |
  $ (2,000) |
$ 51,000 |
Net cash used by investing activities Cash flows from financing  activities: Decrease in bonds payable |
  $ (5,000) |
(2,000) |
Cash dividends paid |
(29,000) |
 |
Net cash used for financing  activities |
 |
(34,000) |
Net increase in cash |
 |
$ 15,000 |
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The president of Zaro Company cannot understand how the company was able to pay cash dividends that were greater than net income and at the same time increase the cash balance. He notes that business was down slightly in 2007.
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Required          a.   Comment on the statement of cash  flows.
b.     Compute the following liquidity ratios for 2007:
1.     Current ratio
2.     Acid-test ratio
3.     Operating cash flow/current maturities of long-term debt and current notes payable
4.     Cash ratio
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c.     Compute the following debt ratios for 2007:
1.     Times interest earned
2.     Debt ratio
d.    Compute the following profitability ratios for 2007:
1.     Return on assets (using average assets)
2.     Return on common equity (using average common equity)
e.     Give your opinion as to the liquidity of Zaro.
f.      Give your opinion as to the debt position of Zaro.
g.     Give your opinion as to the profitability of Zaro.
h.    Explain to the president how Zaro was able to pay cash dividends that were greater than net income and at the same time increase the cash balance.
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