Question

Please show all the steps of calculation.

The following are the financial statements for Patriots and Jets Companies for 2018:

Statements of Financial Position
	Patriots	Jets
Cash	$  25,000	$  45,000
Accounts receivable (net)	55,000	5,000
Inventory	110,000	25,000
Property, plant, and equipment (net)	550,000	160,000
Other long-term assets	140,000	57,000
Total assets	$880,000	$292,000
Accounts payable	$110,000	$  10,000
Salaries payable	10,000	5,000
Current liabilities	$120,000	$  15,000
Long-term liabilities	190,000	55,000
Total liabilities	$310,000	$  70,000
Common shares	530,000	214,000
Retained earnings	40,000	8,000
Total liabilities and shareholders' equity	$880,000	$292,000

Statements of Earnings
	Patriots	Jets
Net sales revenue	$800,000	$280,000
Cost of goods sold (COGS)	480,000	150,000
Gross profit	$320,000	$130,000
Expenses	200,000	75,000
Earnings before interest and taxes	$120,000	$  55,000
Interest expense	10,000	4,000
Earnings before taxes	$110,000	$  51,000
Income tax expense	30,000	16,000
Net income	$ 80,000	$ 35,000

Other Selected Data
	Patriots	Jets
Market price per share at end of 2018	$14.00	$17.00
Average number of shares outstanding	24,000	10,500

Patriots and Jets are in the same line of business and in the same province, but in different cities. One-half of Patriots' sales are on credit, whereas one-quarter of Jets' are on credit. Each company has been in operations for about ten years. Both companies received an unqualified audit opinion. Patriots want to borrow an additional $75,000 and Jets want to borrow an additional $30,000.

Use the information above to answer the questions below. You may wish to also refer to the ratio formula sheet.

Current ratio

Average collection period

Days in inventory

Profit margin

Return on assets

Debt to total assets

Earnings per share (EPS)

Return on common shareholders' equity

Which company appears more profitable? Describe the ratio(s) that you used to reach this decision.

Answer 1

Your answer ia as follows:

Particulars	Patriots	Jets
Current Ratio
Current Assets/Current Liabilities	1.58	5.00	Times
	(25000+55000+110000)/120000	(45000+5000+25000)/1500
Average Collection Period
365 days/Accounts receivable turnover ratio	50.19	26.07	in Days
	365/7.27	365/14
Accounts receivalbe turnover ratio:
Credit Sales/ Average Account Receivable	7.27	14.00	times
	(800000*50%)/55000	(280000*25%)/5000
Days in inventory
365 days/ Inventory turnover	83.65	60.83	days
	365/4.36	365/6
Inventory turnover
Cost of Goods Sold/Average Inventory	4.36	6.00	times
	480000/110000	150000/25000
Profit Margin
Gross Profit/Sales = Gross Profit Margin	40.00%	46.43%
	320000/800000	130000/280000
Net Profit/Sales = Net Profit Margin	10.00%	12.50%
	80000/800000	35000/280000
Return on Assets
Net Income/Total Assets	9.09%	11.99%
	80000/880000	35000/292000
Debt to total Assets
Debt/Total Assets	0.35	0.24	times
	310000/880000	70000/292000
Earnings per share (EPS)
Net Income/Total Number of Shares	$3.33	$3.33
	80000/24000	35000/10500
Return on common shareholders' equity
Net Income/Equity Shareholders Fund	14.04%	15.77%
	80000/(530000+40000)	35000/(214000+8000)

Since Jets has Higher Profit Margin, higher Return on assets, higher Return on Common Shareholders Equity than Patriots with equal Earning Per Share, Jets Appears more profitable.