Question

THE FIRST COMPANY IS ARMSTRONG COMPANY AND THE SECOND IS BLAIR COMPANY

Company Company Balance Sheet $ 43,000 48.000 116,000 196,000 53,000 $ 456,000 $116,000 76.000 192,000 158.000 38,000 68,000 $456,000 $30,000 38.000 56,000 316,000 616,000 $856,000 $ 66,000 386,000 452,000 200.000 118,000 78.000 $856,000 Recounts Receivable, Net Inventory Equipment, Net Other last Total Assets Current Liabilities Note Payable (long-ter) Total Liabilities Common Stock (par $10) Additional Paid-in Capital Retained Earnings Total Liabilities and stockholders' Equity Income statement Sales Revenue Coat of Goods Sold Other Expenses Net Income Other Data Estimated value of each share at end of year Selected Data from Previous Year Accounts Receivable, Net Inventory Equipment, Hot. Note Payable long-term) Total Stockholders Equity $474,000 253,000 168,000 $ 53,000 $834,000 413.000 323,000 $ 98,000 20 28 $ 28,000 100.000 195,000 76,000 239,000 $ 46,000 53.000 316,000 78,000 448,000 The companies are in the same line of business and are direct competitors in a large metropolitan area. Both have been in business approximately 10 years and each has had steady growth. Despite these similarities, the management of each has a different viewpoint in many respects. Blair is more conservative, and as its president said, "We avoid what we consider to be undue risk" Both companies use straight-line depreciation, but Blair estimates slightly shorter useful lives than Armstrong. No shares were issued in the current year and neither company is publicly held, Blair Company has an annual audit by a CPA, but Armstrong Company does not. Assume the end-of-year total assets and not equipment balances approximate the year's average and all sales are on account.

Answer 1

Sl. No.	Profitability Ratio	Formula	Armstrong Compnay		Blair Compnay
			Calculation	Ratio	Calculation	Ratio
1	Net Profit Margin	Net Income / Net Sales	$53000/$474000	11.18%	$98000/$834000	11.75%
2	Gross Profit percentage	(Net Sales - Cost of goods sold)/Net sales	($474000 - $253000) /$ 474000	46.62%	($834000 -$ 413000) /$ 834000	50.48%
3	Fixed Asset Turnover	Net sales / average fixed asset	$474000/ (($196000 +$ 196000)/2)	2.42	$834000 /(($316000 + $316000)/2)	2.64
4	Return on equity	Net Income/Average Shareholders' equity	$53000 / (($239000 + $264000)/2)	21.07%	$98000/(($448000 +$ 404000)/2)	23.00%
5	Earning Per Share	Net Income / Number of common stock outstanding	$53000 / 15800	$           3.35	$98000 / 20800	$         4.71
6	Price Earning Ratio	Market price per share / EPS	$20 / 3.35	5.97	$ 28/4.71	$         5.94
	Test of Liquidity	Formula
7	Receivable Turnover	Credit Sales / Average Accounts Receivable	$474000/(($28000 + $48000)/2)	12.47	$834000 / (($46000+$38000)/2)	19.86
	Days to collect	365 days / Receivable Turnover	365 days / 12.47	29.27 days	365 days / 19.86	18.38 days
8	Inventory Turnover	Cost of goods sold / average inventory	$253000 / (($100000 + $116000)/2)	2.34	$413000 / (($53000+$56000)/2)	7.58
	Days to sell	365 days / Inventory Turnover	365 days / 2.34	155.98 days	365 days / 7.58	48.15 days
9	Current Ratio	Current Assets / Currrent Liabilities	$207000/$116000	1.78	$124000 / $66000	1.88
	Test of Solvency	Formula
10	Debt to Asset	Total Liabilities / Total assets	$192000 / $456000	0.42	$452000 / $856000	0.53

Working Notes:

Shareholders' equity of the current year
	Aermstrong	Blair
Common stock	$    1,58,000	$ 2,08,000
Additional paid in capital	$       38,000	$ 1,18,000
Retained earnings	$       68,000	$     78,000
Stockholders' Equity	$    2,64,000	$ 4,04,000
Common stock outstanding of the current year
	Aermstrong	Blair
Common stock	$    1,58,000	$ 2,08,000
par value	$          10.00	$       10.00
Number of shares outstanding	15800	20800