Question

Required information (The following information applies to the questions displayed below.) Summary information from the financial statements of two companies competing in the same industry follows. Barco Kyan Company Company Data from the current year-end balance sheets Assets Cash $ 22,000 $ 35,000 Accounts receivable, net 33,400 51,400 Merchandise inventory 84,640 134,500 Prepaid expenses 5,900 7,650 Plant assets, net 360,000 306, 400 Total assets $505,940 $534,950 Barco Kyan Company Company Data from the current year's income statement Sales $770,000 $912,200 Cost of goods sold 590,100 638,500 Interest expense 8,400 13,000 Income tax expense 14,800 25,183 Net income 156,700 235,517 Basic earnings per share 3.92 4.99 Cash dividends per share 3.81 3.92 Liabilities and Equity Current liabilities Long-term notes payable Common stock, $5 par value Retained earnings Total liabilities and equity $ 70, 340 $101,300 80,800 107,000 200,000 236,000 154,800 90,650 $505,940 $534,950 Beginning-of-year balance sheet data Accounts receivable, net Merchandise inventory Total assets Cormon stock, $5 par value Retained earnings $ 25,800 $ 54,200 61,600 105,400 458,000 382,500 200,000 236,000 150,500 40,157 Required: 1a. For both companies compute the (a) current ratio, (b) acid-test ratio, (c) accounts receivable turnover, (d) inventory turnover, (e) days' sales in inventory, and (1) days' sales uncollected. (Do not round intermediate calculations.) 1b. Identify the company you consider to be the better short-term credit risk.

Answer 1

1. A) Current Ratio

Company	Choose Numerator	/	Choose Denominator	=	Current Ratio
	Current Asset	/	Current Liabilities	=	Current Ratio
Barco	$145,940	/	$70,340	=	2.07
Kyan	$228,550	/	$101,300	=	2.56

Current Asset Barco = $22,000+$33,400+$84,640+$5,900 = $145,940

Kyan = $35,000+$51,400+$134,500+$7,650=$228,550

B. Acid Test Ratio

Company	Choose Numerator	/	Choose Denominator	=	Acid Test Ratio
	Cash	Accounts Receivable	/	Current Liabilities	=	Acid Test Ratio
Barco	$22,000	$33,400	/	$70,340	=	.79
Kyan	$35,000	$51,400	/	$101,300	=	.85

C. Accounts Receivable Turnover

Company	Choose Numerator	/	Choose Denominator	=	Accounts Receivable Turnover
	Net Sales	/	Average Accounts Receivable	=	Accounts Receivable Turnover
Barco	$770,000	/	$29,600	=	26.01
Kyan	$912,200	/	$52,800	=	17.28

D. Inventory Turnover

Company	Choose Numarator	/	Choose Denominator	=	Inventory Turnover
	Cost of Goods Sold	/	Average Inventory	=	Inventory Turnover
Barco	$590,100	/	$73,120	=	8.07
Kyan	$638,500	/	$119,950	=	5.32

E. Days Sales in Inventory

Company	Choose Numarator	/	Choose Denominator	×	Days	=	Days Sales in Inventory
	Merchandise Inventory	/	Cost of Goods Sold	×	365	=	Days Sales in Inventory
Barco	$84,640	/	$590,100	×	365	=	52.35 Days
Kyan	$134,500	/	$638,500	×	365	=	76.88Days

F. Days Sales Uncollected

Company	Choose Numarator	/	Choose Denominator	×	Days	=	Days Sales Uncollected
	Current Receivable	/	Net Sales	×	365	=	Days Sales Uncollected
Barco	$33,400	/	$770,000	×	365	=	15.8 Days
Kyan	$51,400	/	$912,200	×	365	=	20.6 Days

2. Barco Company is the Better short term credit risk