Chapter 3 problem #37. Ratio computation and analysis (LO2) Given the financial statements for Jones Corporation and Smith Corporation shown here:

a. To which one would you, as credit manager for a supplier, approve the extension of (short-term) trade credit? Why? Compute all ratios before answering.

b. In which one would you buy stock? Why?

JONES CORPORATION
Current Assets		Liabilities
Cash.............................................	$ 20,000	Accounts payable..................	$100,000
Accounts receivable.....................	80,000	Bonds payable (long-term)....	80,000
Inventory......................................	50,000
Long-Term Assets		Stockholders Equity
Fixed assets..................................	$500,000	Common stock.......................	$150,000
Less: Accumulated depreciation	(150,000)	Paid-in capital......................	70,000
Net fixed assets*..........................	350,000	Retained earnings.................	100,000
Total assets...............................	$500,000	Total liab. and equity........	$500,000

Sales (on credit)....................................................................	$1,250,000
Cost of goods sold...............................................................	750,000
Gross profit..........................................................................	500,000
Selling and administrative expense..................................	257,000
Less: Depreciation expense...............................................	50,000
Operating profit....................................................................	193,000
Interest expense....................................................................	8,000
Earnings before taxes...........................................................	185,000

Tax expense...........................................................................	92,500
Net income............................................................................	$ 92,500

*Use net fixed assets in computing fixed asset turnover.

Includes $7,000 in lease payments.

SMITH CORPORATION
Current Assets		Liabilities
Cash................................	$ 35,000	Accounts payable..................	$ 75,000
Marketable securities......	7,500	Bonds payable (long-term)....	210,000
Accounts receivable........	70,000
Inventory........................	75,000
Long-Term Assets		Stockholders Equity
Fixed assets.....................	$500,000	Common stock......................	$ 75,000
Less: Accum. dep.........	(250,000)	Paid-in capital........................	30,000
Net fixed assets*............	250,000	Retained earnings..................	47,500
Total assets................	$437,500	Total liab. and equity...........	$437,500

*Use net fixed assets in computing fixed asset turnover.

SMITH CORPORATION
Sales (on credit)....................................................................	$1,000,000
Cost of goods sold................................................................	600,000
Gross profit...........................................................................	400,000
Selling and administrative expense...................................	224,000
Less: Depreciation expense................................................	50,000
Operating profit....................................................................	126,000
Interest expense....................................................................	21,000
Earnings before taxes............................................................	105,000
Tax expense...........................................................................	52,500
Net income............................................................................	$ 52,500

Includes $7,000 in lease payments.