Chapter 17 Following are data from the statements of two companies selling similar products: Current Year-End Balance Sheets Cash Notes receivable-short-term Accounts receivable, net.. Inventory Prepaid expenses. Plant and equipment, net Total assets. Sled Company $ 11,900 7,700 42,000 58,800 1,680 232,120 $354,200 Zip Company $ 20,000 3,200 64,000 87,680 3,520 274.400 $452.800 Current liabilities Mortgage payable.. Common stock, $10 par value Retained earnings. Total liabilities and stockholders' equity $ 56,000 70,000 140,000 88.200 $354,200 $ 80,000 80,000 160,000 132.800 $452,800 Data from the Current Year's Income Statement Sales ........ $672,000 Cost of goods sold. 528,080 Interest expense. 4,200 Net income... 23,373 Beginning-of-Year Data Inventory $ 53,200 Total assets.. 345,800 $880,000 699,840 5,600 28,896 $ 85,120 443,200 Stockholders' equity... 217,000 285,120 Required: 1. Calculate current ratios, acid-test ratios, inventory turnovers, and days' sales uncollected for the two companies. Then state which company you think is the better short-term credit risk and why. 2. Calculate return on total assets employed and return on stockholders' equity. Then, under the assumption that each company's stock can be purchased at book value, state which company's stock you think is the better investment and why. Sled Company Zip Company Current ratio: $122.080 $ 56,000 = 2.18 to 1 = 2.23 to 1 $178.400 $ 80,000 Acid-test ratio: $ 61.600 $ 56,000 = 1.10 to 1 $ 87.200 $ 80,000 = 1.09 to 1 Inventory turnover: $528.080 $ 56,000 = 9.4 times $669.840 $ 86,400 = 7.8 times x 365 = 22.8 Days' sales uncollected: $ 42,000 $672,000 X 365 = 26.5 $ 64,000 $880,000 Sled Company and Zip Company have almost equal current and acid-test ratios, so near the same that the differences are not significant. However, Sled Company turns its inventory and collects its accounts receivable more rapidly than Zip Company; and on this basis it appears to be a better short-term credit risk. Part 2 Assignment to be completed by midnight on Saturday This is a graded discussion: 15 points possible Analyzing Financial Statements Chapter 17 Following are data from the statements of two companies selling similar products: Current Year-End Balance Sheets Sled Company Zip Company Cash........ $ 11,900 $ 20,000 Notes receivable-short-term..... 7,700 3,200 Accounts receivable, net... 42,000 64,000 Inventory.. 58,800 87,680 Prepaid expenses...... 1,680 3,520 Plant and equipment, net.... 232.120 274.400 Total assets.. $354,200 $452,800 . o Current liabilities $ 56,000 Mortgage payable. $ 80,000 70,000 Common stock, $10 par value.. 80,000 140,000 Retained earnings... 160.000 88.200 Total liabilities and stockholders' equity... 132.800 $354.200 $452.800 Data from the Current Year's Income Statement Sales............ $672,000 $880,000 Cost of goods sold. 528,080 699,840 Interest expense... 4,200 5,600 Net income... 23,373 28,896 Beginning-of-Year Data Inventory. $ 53,200 $ 85,120 Total assets. 345,800 443,200 Stockholders' equity... 217,000 285,120 Required: 1. Calculate current ratios, acid-test ratios, inventory turnovers, and days' sales uncollected for the two companies. Then state which company you think is the better short-term credit risk and why. 2. Calculate retum on total assets employed and return on stockholders' equity. Then, under the assumption that each company's stock can be purchased at book value, state which company's stock you think is the better investment and why. Solution: Chapter 17 Alternate Demonstration Problem Part 1 Sled Company Zip Company Current ratio: $122.080 $ 56,000 2.18 to 1 $178.400 $ 80,000 2.23 to 1 Acid-test ratio: $ 61,600 $ 56,000 1.10 to 1 $187.200 $ 80,000 1.09 to 1 Inventory turnover: $528.080 $ 56,000 9.4 times $669,840 $ 86,400 7.8 times X 365 22.8 Days' sales uncollected $ 42.000 $672,000 $ 64.000 $880,000 X 365 -26.5 Sled Company and Zip Company have almost equal current and acid-test ratios, so near the same that the differences are not significant. However, Sled Company turns its inventory and collects its accounts receivable more rapidly than Zip Company, and on this basis it appears to be a better short-term credit risk. Part 2 Assignment to be completed by midnight on Saturday