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 the extension of (short-term) trade credit? Why? Compute all ratios before answering.
b. In which one would you buy stock? Why?


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

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 leasepayments.


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  • CreatedOctober 14, 2014
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