Problem. Ratio computation and analysis. Given the financial statements for Jones

Corporation and Smith Corporation shown here:

JONES CORPORATION: Balance Seet

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$

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.

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: 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.

a$.$ Compute all ratios before answering.

b$.$ Give a brief description of Jone$$s Ratios.

c$.$ To which one would you, as credit manager for a supplier, approve the extension of $($short$-$term$)$ trade credit? Why?

d$.$ In which one would you buy stock? Why?

Jones and Smith Comparison

One way of analyzing the situation for each company is to compare the respective ratios for each. Calculate those ratios which would be most important to a supplier or short$-$term lender and a stockholder.

a$.$ Ratios

Jones Corp. Smith Corp.

Profit margin

Return on assets $($investments$)$

Return on equity

Receivable turnover

Average collection period

Inventory turnover

Fixed asset turnover

Total asset turnover

Current ratio

Quick ratio

Debt to total assets

Times interest earned

Fixed charge coverage

Fixed charge coverage calculation

b$.$ Interpretation

Jones Corp.

Profit margin

Return on assets $($investments$)$

Return on equity

Receivable turnover

Average collection period

Inventory turnover

Fixed asset turnover

Total asset turnover

Current ratio

Quick ratio

Debt to total assets

Times interest earned

Fixed charge coverage

Fixed charge coverage calculation