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Financial Management, MBA511, Section: 01 Chapter 3: Problems

This document contains financial statements for Jones Corporation and Smith Corporation. It asks the reader to determine which company would be approved for an extension of trade credit and which company they would buy stock in, based on an analysis of key financial ratios. It provides balance sheet and income statement data for both companies to allow the reader to calculate various ratios and make recommendations.

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133 views2 pages

Financial Management, MBA511, Section: 01 Chapter 3: Problems

This document contains financial statements for Jones Corporation and Smith Corporation. It asks the reader to determine which company would be approved for an extension of trade credit and which company they would buy stock in, based on an analysis of key financial ratios. It provides balance sheet and income statement data for both companies to allow the reader to calculate various ratios and make recommendations.

Uploaded by

Shakil
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 03: Financial Analysis

Financial Management, MBA511, Section: 01


Chapter 3: Problems
Problem 37, page 88

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
Balance Sheet
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

JONES CORPORATION
Income Statement

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.

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Chapter 03: Financial Analysis

SMITH CORPORATION
Balance Sheet
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
Income Statement
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.

NOTE: Use Sales (on credit) instead of COGS to calculate inventory turnover ratio.

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