Tom Miller and Larry Rogers each started separate businesses on December 1, 2011, by contributing $6,000 of their own funds. Early in December, both men purchased 120 shares of Diskette common stock, which was selling at the time for $26 per share, and classified the investment as available-for-sale securities. During December, they both also purchased $1,500 of inventory on account.
As of December 30, the market price of Diskette common stock had risen to $32 per share. Tom was delighted by the price increase but chose simply to hold the stock, expecting that the price would continue to appreciate for at least another month. Larry, on the other hand, sold his shares, but immediately repurchased them because he too believed that they would continue to appreciate.
a. Prepare separate year-end balance sheets for both Tom and Larry.
b. Compute net income, working capital, and the current ratio for both Tom and Larry.
c. From the financial statements alone, which of the two appears to be in the better financial position? Why?
d. Assume that there are brokerage commissions on all security purchases and sales. Which of the two is actually in the better financial position? Why?