Requirement 1. Compute the following ratios for both companies for the current year, and decide which company’s stock better fits your investment strategy. a. Acid-test ratio b. Inventory turnover c. Days’ sales in receivables
Requirement 1. Compute the following ratios for both companies for the current year, and decide which company’s stock better fits your investment strategy. a. Acid-test ratio b. Inventory turnover c. Days’ sales in receivables
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter15: Financial Statement Analysis
Section: Chapter Questions
Problem 66P
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Question
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Requirement | ||||||
1. Compute the following ratios for both companies for the current year, and decide which company’s stock better fits your investment strategy. | ||||||
a. Acid-test ratio | ||||||
b. Inventory turnover | ||||||
c. Days’ sales in receivables | ||||||
d. Debt ratio | ||||||
e. Earnings per share of common stock | ||||||
f. Price/earnings ratio | ||||||
g. Dividend payout |
![B c D E
F
G
1 Using ratios to decide between two stock investments
2
Assume that you are purchasing an investment and have decided to invest in a
company in the digital phone business. You have narrowed the choice to
3 Digitalized, Corp., and Zone Network, Inc., and have assembled the following
4
5 Selected income statement data for the current year:
6
7
Digitalized
Zone Network
9 Net sales (all on credit) . .
$
423,035 $
493,115
....
10 Cost of goods sold
11
Interest expense
12
Net income . .
13
14
206,000
258,000
...
19,000
54,000
66,000
15 Selected balance sheet and market price data at the end of the current year:
16
17
Digitalized Zone Network
18
Current assets:
19
Cash ..
20
Short-term investments
$
23,000 $
21,000
38,000
19,000
21
Current receivables, net
43,000|
22
23 Inventories ...
38,000
64,000
96,000](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F355e5bf6-ac27-430c-9e35-572cf3fa835b%2Fcdfb1b04-11f3-4864-96d7-3b17ae190606%2Fwmp3ul8_processed.png&w=3840&q=75)
Transcribed Image Text:B c D E
F
G
1 Using ratios to decide between two stock investments
2
Assume that you are purchasing an investment and have decided to invest in a
company in the digital phone business. You have narrowed the choice to
3 Digitalized, Corp., and Zone Network, Inc., and have assembled the following
4
5 Selected income statement data for the current year:
6
7
Digitalized
Zone Network
9 Net sales (all on credit) . .
$
423,035 $
493,115
....
10 Cost of goods sold
11
Interest expense
12
Net income . .
13
14
206,000
258,000
...
19,000
54,000
66,000
15 Selected balance sheet and market price data at the end of the current year:
16
17
Digitalized Zone Network
18
Current assets:
19
Cash ..
20
Short-term investments
$
23,000 $
21,000
38,000
19,000
21
Current receivables, net
43,000|
22
23 Inventories ...
38,000
64,000
96,000
![C D
A
В
E
G
Total assets
266,000 $
326,000
Total current liabilities
9 Total liabilities ..
o Common stock, $1 par (12,000 shares)
102,000
96,000
102,000
131,000
12,000
$2 par (16,000 shares)
32,000.
2 Total stockholders' equity ...
$
164,000 $
195,000-
Market price per share of common stock .. $
76.50 $
94.99
4
Dividends paid per common share ...
$
0.50 $
0.40
..
7 Selected balance sheet data at the beginning of the current year:
Digitalized
Zone Network
* Balance sheet:
Current receivables, net
$
44,000 $
53,000
Inventories
80,000
86,000
262,000
12,000
Total assets .
276,000
5 Common stock, $1 par (12,000 shares)
$2 par (16,000 shares)
32,000
Your strategy is to invest in companies that have low price/earnings ratios but
appear to be in good shape financially. Assume that you have analyzed all other
8 factors and that your decision depends on the results of ratio analysis.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F355e5bf6-ac27-430c-9e35-572cf3fa835b%2Fcdfb1b04-11f3-4864-96d7-3b17ae190606%2Fk7g5q4q_processed.png&w=3840&q=75)
Transcribed Image Text:C D
A
В
E
G
Total assets
266,000 $
326,000
Total current liabilities
9 Total liabilities ..
o Common stock, $1 par (12,000 shares)
102,000
96,000
102,000
131,000
12,000
$2 par (16,000 shares)
32,000.
2 Total stockholders' equity ...
$
164,000 $
195,000-
Market price per share of common stock .. $
76.50 $
94.99
4
Dividends paid per common share ...
$
0.50 $
0.40
..
7 Selected balance sheet data at the beginning of the current year:
Digitalized
Zone Network
* Balance sheet:
Current receivables, net
$
44,000 $
53,000
Inventories
80,000
86,000
262,000
12,000
Total assets .
276,000
5 Common stock, $1 par (12,000 shares)
$2 par (16,000 shares)
32,000
Your strategy is to invest in companies that have low price/earnings ratios but
appear to be in good shape financially. Assume that you have analyzed all other
8 factors and that your decision depends on the results of ratio analysis.
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