Share
Explore BrainMass

Johnson Corporation and Simpson Corporation

Given the financial statements for Johnson Corporation and Simpson Corporation shown here:

a. To which company would you, as credit manager for a supplier, approve the extension of (short-term) trade credit? Why? Compute all relevant ratios before answering.

b. In which one would you buy stock? Why?

See attached file for full problem description.

Attachments

Solution Preview

Given the financial statements for Johnson Corporation and Simpson Corporation shown here:

a. To which company would you, as credit manager for a supplier, approve the extension of (short-term) trade credit? Why? Compute all relevant ratios before answering.

Johnson Corporation Simpson Corporation

1. Current ratio
= current assets = 150,000 = 187,500
current liabilities 100,000 75,000

= 1.5 = 2.5
2. Acid-test ratio

= current assets - inventories
current liabilities

= 150,000 - 50,000 = 187,500 - 75,000
100,000 75,000

= 1.0 = 1.5

3. Cash ratio
= cash and cash equivalents
current liabilities

= 20,000 = 42,500
100,000 ...

Solution Summary

This solution is comprised of a detailed explanation to compute the financial ratios of Johnson Corporation and Simpson Corporation and consider which company the investor should invest.

$2.19