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Johnson Corporation and Simpson Corporation

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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?

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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.

\$2.49