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Financial Comparison of Sled and Zip Companies

This document provides financial data from the balance sheets and income statements of two companies, Sled Company and Zip Company. It asks the reader to: 1. Calculate various financial ratios for each company and determine which is a better short-term credit risk based on the ratios. Sled Company has a slight advantage due to its higher inventory turnover and lower days' sales uncollected. 2. Calculate return on assets and return on equity for each company. Under the assumption shares can be purchased at book value, state which company is a better investment. Sled Company is a better investment since it has higher returns on both assets and equity.

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Mahmoud Ibrahim
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16 views2 pages

Financial Comparison of Sled and Zip Companies

This document provides financial data from the balance sheets and income statements of two companies, Sled Company and Zip Company. It asks the reader to: 1. Calculate various financial ratios for each company and determine which is a better short-term credit risk based on the ratios. Sled Company has a slight advantage due to its higher inventory turnover and lower days' sales uncollected. 2. Calculate return on assets and return on equity for each company. Under the assumption shares can be purchased at book value, state which company is a better investment. Sled Company is a better investment since it has higher returns on both assets and equity.

Uploaded by

Mahmoud Ibrahim
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

NAME : MAHMOUD IBRAHIM SAYED ABDELRAHMAN

GROUP : GC2

Following are data from the statements of two companies selling similar products:

Current Year-End Balance Sheet Data from the Current Year’s Income Statement
Sled Company Zip Company Sled Company Zip Company

Cash 11,900 20,000 Sales 672,000 880,000

Notes receivable—short-term 7,700 3,200 Cost of goods sold 528,080 699,840

Accounts receivable, net 42,000 64,000 Interest expense 4,200 5,600

Inventory 58,800 87,680 Net income 23,373 28,896

Prepaid expenses 1,680 3,520

current assets 122,080 178,400 Beginning-of-Year Data


Plant and equipment, net 232,120 274,400 Sled Company Zip Company

Total assets 354,200 452,800 Inventory 53,200 85,120

Current liabilities 56,000 80,000 Total assets 345,800 443,200

Mortgage payable 70,000 80,000 Stockholders’ equity 217,000 285,120

Total liabilities 126,000 160,000


Common stock, $10 par value 140,000 160,000 Sled Company Zip Company

Retained earnings 88,200 132,800 average inventory 56000 86400

Total equity 228,200 292,800 average total assets 350000 448000

Total equity and liabilities 354,200 452,800 avg. Stockholders’ equity 222600 288960
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.

Sled Company Zip Company

Current ratio current asset / current liabilities 2.18 2.23

Acid-test ratio. current asset - inv. / current liabilities 1.13 1.134

Inventory turnover. cost of good sales / average inventory 9.43 8.1

days’ sales uncollected account recivable x 365 / sales 22.81 26.55

comment : from the calculated ratio above zip company has slightly higher current ratio and acid -test ratio which
means that and both above 1 which means that zip company has a slightly better short -term credit risk compared to
sled company , but both of the companies can meet their short term credit obligations without even selling thier
inventory if they collected thier reciavables , but sled company has an advantage in selling its inventory with
inventory turnover ratio of 9.43 compared to zip company inventory turnover of 8.1 also sled company has a lower
days’ sales uncollected ratio of 22.81 compared to zip company ratio of 26.55 which present the advantage to sled
company to collect it's account resivable .

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

Sled Company Zip Company

return on total assets employed Net Income / average total assets 6.68% 6.45%

return on stockholders’ equity net income - p.d / average total equity 10.50% 10.00%

comment : sled company is the better investment because it has a higher return on assets and also a higher return on
equity compared to zip company

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