Question

Presented below are condensed financial statements adapted from those of two actual companies competing in the pharmaceutical industry, Johnson and Johnson (J&J) and Pfizer, Inc. ($ in millions, except per share amounts). Balance Sheets ($ in millions, except per share data) J&J Pfizer Assets: Cash $ 9,959 $ 5,184 Short-term investments 4,914 11,170 Accounts receivable (net) 7,444 9,645 Inventories 4,384 7,233 Other current assets 4,240 4,105 Current assets 30,941 37,337 Property, plant, and equipment (net) 11,982 20.423 Intangibles and other assets 16,958 70,283 Total assets $59,881 $128,043 Liabilities and shareholders' Equity: Accounts payable $ 5,776 $ 3,411 Short-term notes 2,525 10,204 Other current liabilities 8,093 12,988 Current liabilities 16,394 26,603 Long-term debt 3,705 6,505 Other long-term liabilities 5,729 22,724 Total liabilities 25,828 55,832 Capital stock (par and additional paid- and 4,020 67,950 in capital) Retained earnings 37,633 36,012 Accumulated other comprehensive income (710) 225 (loss) Less: Treasury stock and other equity (6,890) (31,976) adjustments Total shareholders' equity 34,053 72,211 Total liabilities and $59,881 $128,043 shareholders' equity Income Statements Net sales $ 45,072 $ 48,398 Cost of goods sold 12,932 10,588 Gross profit 32,140 37,810 Operating expenses 20,495 29,218 Other (income) expense-net (475) 3,700 Income before taxes 12, 1204 ,892 Tax expense 3,636 1,468 Net income $ 8,484 $ 3,424* Basic net income per share $ 2.72 $ 0.52 * This is before income from discontinued operations. Evaluate and compare the two companies by responding to the following questions. Note: Because two-year comparative statements are not provided, you should use year-end balances in place of average balances as appropriate. Required: 1. For both companies, compute the ratios below. 2. Evaluate and compare the two companies.

Answer 1

(1)

Accounts receivable turnover ratio = net credit sales/average accounts receivable

for J&J,

= $45072/$7444

= 6.05 times

For Pfizer,

= $48398/$9645

= 5.02 times

(2)

Average collection period = 365/accounts receivable turnover ratio

for J&J,

= 365/6.05

= 60.33 days

For Pfizer,

= 365/5.02

= 72.71 days

(3)

Inventory turnover ratio = cost of goods sold/average inventory

for J&J,

= $12932/$4384

= 2.95 times

For Pfizer,

= $10588/$7233

= 1.46 times

(4)

Average sales period = 365/inventory turnover ratio

for J&J,

= 365/2.95

= 123.73 days

For Pfizer,

= 365/1.46

= 250 days