Question

Ctio IT-Uw 11, -- Following are data from the statements of two companies selling similar products: Current Year-End Balance Sheets Sled Zip Company $ 20,000 3,200 64,000 87,680 3,520 274.400 S452.800 Company $ 11,900 7,700 42,000 58,800 1,680 232.120 S354.200 Cash Notes receivable-short-term Accounts receivable, net. Inventory Prepaid expenses Plant and equipment, net... Total assets. $ 56,000 70,000 140,000 88,200 $354.200 $ 80,000 80,000 160,000 132,800 S452.800 Current liabilities... Mortgage payable. Common stock, $10 par value. Retained earnings Total liabilities and stockholders' equity. Data from the Current Year's Income Statement Sales Cost of goods sold Interest expense.. Net income. $672,000 528,080 4,200 23,373 $880,000 699,840 5,600 28,896 Beginning-of-Year Data S 53,200 345,800 217,000 $ 85,120 443,200 285,120 Inventory Total assets. Stockholders' equity 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.

Answer 1

SOLUTION:

1)	Ratios	Formula	Sied Co.	Zip Co.
	Current Ratio:	Current Assets/Current liabilities	2.18	2.23
		Current Assets(except plant & equipment)	122080	178400
		Current Liabilites	56000	80000
	Acid test Ratio	Quick Assets/Quick liabilities	1.1	1.09
		Quick Assets=Current Assets-Inventory-prepraid expenses	61600	87200
		Quick Liabilites=Current liabilities-bank OD-CC	56000	80000
	Inventory Turnover ratio	COGS/Average stock	6.39	5.43	times
		COGS(given)	528080	699840
		Average stock(given)	82600	128960
	Days sales uncollected	Accounts receivable/Net annual credit sales*365	26.99	27.87	days
		Accounts receivable	49700	67200
		Net annual credit sales	672000	880000
	Analysis	Sied Co. is better in all respects as per its days sales uncollected and Inventory T/O
		Also, there is no idle current assets as per its ratios
2)	Return on total assets	EBIT/Average ofTotal Assets	28.75	28.11
		EBIT=Net income+Interest+tax	27573	34496
		Average Total Assets(Opening+closing/2)	350000	448000
	Return on stock holder equity	Net Income/Equity	37.38	36.02
		Net Income	23373	28896
		Equity	228200	292800
	As per above calculations, the ROE of Sied Co. is higher and its book value is also higher.
	So it is a better for investment