Buchanan Company Has the Following Financial Data on December 31

question 25

Essay

Buchanan Company has the following financial data on December 31, 2017 and 2016:
$\begin{array}{lrr}&12 / 31 / 16 &12 / 31 / 17\\\text { Cash } & \$ 16,000 & \$ 21,000 \\\text { Accounts receivable } & 12,000 & 4,000 \\\text { Inventory } & 15,000 & 12,000 \\\text { Net plant and equipment } & 5,000 & 3,000 \\\text { Current liabilities } & 8,000 & 18,000 \\\text { Common stock } & 5,000 & 5,000 \\\text { Retained earnings } & 31,000 & 2,000\end{array}$

$\begin{array}{lr}\text { Buchanan 's } 2017 \text { income statement reported }\\\text { Revenue } & \$ 160,000 \\\text { Cost of goods sold } & 150,000 \\\text { Gross margin } & \$ 10,000 \\\text { Depreciation expense } & 2,000 \\\text { Net income } & \$ 8,000 \\\end{array}$


$\begin{array}{lr}\text { Buchanan's } 2017 \text { data from its statement of cash flows: }\\ \text { Cash flow from operations } & \$ 42,000 \\\text { Cash flow from investing activities } & 0 \\\text { Cash flow from financing activities, (all dividends paid) } & (22,000)\end{array}$
Required: Using appropriate ratios, comment on the change in Buchanan's solvency position and assess the probable cause of the change from 2016 to 2017.

---

Definitions:

Consumption Proportions

The ratios at which various goods and services are consumed by an individual or in an economy.

Price Change

A variation in the price level of goods or services over a period of time, which can affect demand, supply, and market equilibrium.

Initial Endowment

The initial set of assets, goods, or resources individuals or entities possess before engaging in transactions or economic activities.

Kumquats

Small, orange citrus fruits with a sweet and tangy flavor, edible both peel and flesh.