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 liabilities 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.