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Alternate Demonstration Problem
Chapter Seventeen
Following are data from the statements of two companies selling similar
products:
Current Year-End Balance Sheets
Sled
Company
Zip
Company
Cash........................................................................ $ 11,900 $ 20,000
Notes receivable—short-term.............................. 7,700 3,200
Accounts receivable, net...................................... 42,000 64,000
Inventory................................................................ 58,800 87,680
Prepaid expenses.................................................. 1,680 3,520
Plant and equipment, net...................................... 232,120 274,400
Total assets............................................................ $354,200 $452,800
Current liabilities................................................... $ 56,000 $ 80,000
Mortgage payable.................................................. 70,000 80,000
Common stock, $10 par value.............................. 140,000 160,000
Retained earnings................................................. 88,200 132,800
Total liabilities and stockholders’ equity............ $354,200 $452,800
Data from the Current Year’s Income Statement
Sales....................................................................... $672,000 $880,000
Cost of goods sold................................................ 528,080 699,840
Interest expense.................................................... 4,200 5,600
Net income............................................................. 23,373 28,896
Beginning-of-Year Data
Inventory................................................................ $ 53,200 $ 85,120
Total assets............................................................ 345,800 443,200
Stockholders’ equity............................................. 217,000 285,120
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.
Solution: Alternate Demonstration Problem
Chapter Seventeen
Part 1
Sled Company Zip Company
Current ratio: $122,080
$ 56,000
= 2.18 to 1 $178,400
$ 80,000
= 2.23 to 1
uncollected:
$672,000
$880,000
Sled Company and Zip Company have almost equal current and acid-test
ratios, so near the same that the differences are not significant. However,
Part 2
Return on total assets: $ 23,373
$350,000 = 6.68% $ 28,896
$448,000 = 6.45%
Assuming that the stock of each company could be purchased at book
value, Sled Company’s stock seems to be the better investment. This
conclusion is based on Sled’s slightly better return on stockholders’ equity
