Accounting 2

Assume that you are purchasing an investment and have decided to invest in a company in the smartphone business. You have narrowed the choice to Best Digital Electronics or Zone Network Electronics and have assembled the following data.

Selected income statement data for the current year follows:

Income Statement
Best Digital Zone Network
Net sales (all on credit) $467,200 $569,400
Cost of goods sold $203,000 $242,000
Interest expense $0 $19,500
Net income $72,800 $95,400

Selected balance sheet data at the beginning of the current year follow:

Balance Sheet
Best Digital Zone Network
Current receivables, net $45,060 $53,780
Inventories $73,000 $73,000
Total assets $262,000 $274,000
Common stock
$1 par (13,000 shares) $13,000
$1 par (18,000 shares) $18,000

Selected balance sheet and market price data at the end of the current year follow:

Best Digital Zone Network
Current assets

Cash $ 27,000
$ 18,000

Short-term investments $ 38,520
$ 15,400
Current receivables, net $37,500
$ 44,500
Inventories $ 72,000 $ 103,000
Prepaid expenses $ 4,980 $ 6,100
Total current assets $180,000 $ 187,000
Total assets $300,000 $ 325,000
Total current liabilities $102,000 $95,000
Total liabilities $102,000 $ 143,000
Common stock
$1 par (13,000 shares) $ 13,000
$1 par (18,000 shares) $ 18,000
Total stockholders’ equity $198,000 $ 182,000
Market price per share of common stock $ 98.00 $ 100.70


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 factors and that your decision depends on the results of ratio analysis.

Compute the following ratios for both companies for the current year and decide which company’s stock better fits your investment strategy. Assume all sales are on credit.

Acid-test ratio

Inventory turnover

Days’ sales in average receivables

Debt ratio

Gross profit percentage

Earnings per share of common stock

Price/earnings ratio

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