Question
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
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.
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