Question

7 3.84 7,600 Plant assets, net Total assets Liabilities and Equity Current Sabi ities Common stock, $5 par value Total 1abiiieles and equity Data fros the current year's incone statement Cost of goods sold $280,eese6, 200 inventory 216,00.eo くPrey O Type here to search

Answer 1

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SOLUTION

(1A) Current ratio

The current ratio is a liquidity ratio which calculates the ability of company to fulfill short term obligations. It is calculated as:

Current Assets / Current Liabilities

A ratio of 1:1 is optimal as it indicates that current assets can fully fulfill current liabilities.

For this calculation :

Barco Company

$21,500 cash +$39,400 receivables + $9,100 current notes receivable + $84,540 merchandise inventory + $6,000 prepaid expenses / $70,340 current liabilities

$160,540 / $70,340 = 2.3

Kyan Company

$36,000 cash +$59,400 receivables + $7,200 current notes receivable + $138,500 merchandise inventory + $7,600 prepaid expenses / $99,300 current liabilities

$248,700 / $99,300 = 2.5

(1A) Acid-Test Ratio

The acid-test ratio is also called quick ratio. It is also a liquidity ratio that calculates the co.'s ability to fulfill short term obligations. The ratio numerator however only considers only those current assets which are easily convertible to cash and excludes those current assets which cannot be converted easily to cash such as inventory and prepaid expenses. The ratio is calculated as follows

Cash and cash equivalents + Accounts Receivable / Current Liabilities.

For this calculation

Barco Company

$21,500 cash +$39,400 receivables + $9,100 current notes receivable / $70,340 current liabilities

$70,000 / $70,340 = 0.99

Kyan Company

$36,000 cash +$59,400 receivables + $7,200 current notes receivable / $99,300 current liabilities

$102,600 / $99,300 = 1.03

(1A) Accounts receivable turnover

Accounts receivable turnover is a kind of efficiency ratio which tests the companies ability to collect credit sales. The ratio is calculated as follows:

Net Credit Sales / Average Accounts and Notes Receivable.

For this calculation

Barco Company

$780,000/($34,700+$4,550)/2

$780,000 / $39,250 = 19.9

Kyan Company

$906,200/ ($56,300+$3,600)/2

$906,200 / $59,900 = 15.12

(!A) Inventory turnover

Inventory turnover is also an efficiency ratio. It tells how many times a company has sold and repurchased inventory for stock. The ratio is calculated by:

Cost of Sales / Average Inventory.

For this calculation

Barco Company

$587,100 / ( $61,600+$84,540)/2

$587,100 / $73,070 = 8.03

Kyan Company

$640,500 / ($138,500+$115,400)/2

$640,500 / $126,950 = 5.04

(e) Days sales in inventory

Days sales in inventory is very similar to the inventory turnover ratio but it shows the exact number of days inventory are held in lieu of the number of times inventory turned during the year. The ratio is calculated :

Average Inventory / Cost of Goods Sold * 365 days

For this calculation:

Barco Company

(( $84,540+$61,600)/2 / $587,100) x 365

($73,070 / $587,100) x 365 = 45.4 days

Kyan Company

(($115,400+$138,500)/2 / $640,500) x 365

($126,950 / $640,500) x 365 = 72.3 days

(1A) Days sales uncollected

Days sales uncollected is also similar to receivable turnover but reports the exact number of days of sales remain uncollected in lieu of the number of times receivables turn during a year. The ratio is calculated by

Average Accounts Receivables / Net Sales * 365 days

For this calculation

Barco Company

($30,000+$39,400)/2/ $780,000) x 365

($34,700 / $780,000) x 365 = 16.2 days

Kyan Company (($53,200+$59,400)/2 / $906,200) x 365

($56,300 / $906,200) x 365 = 22.7 days

(1B) Barco Company appears to manage short term risk more efficiently than Kyan due to the quicker receivable turnover, and less overall inventory maintain which restricts less cash flow available.

(2A) Profit margin ratio

The profit margin ratio is a profitability ratio which test the overall net income earned.The ratio is calculated:

Net Income / Net Sales

For this calculation :

Barco Company

$169,008 / $780,000 = 21.7%

Kyan Company

$228,683 / $906,200 = 25.2%

(2A) Total Assets Turnover

The total assets turnover is a ratio which tests how effectively a company utilizes its assets. The ratio is calculated :

Total Sales / Average Total Assets

For this calculation:

Barco Company

$780,000 / ($448,000+$450,540) / 2

=$780,000 / $449,270 = 1.7

Kyan Company

$906,200 / ($372,500 + $561,100)/2

=$906,200 / $466,800 = 1.9

(2A) Return on total assets

Return on total assets is similar to total assets turnover. The ratio is calculated :

Earnings before interest and taxes / Total Net Assets.

For this calculation

Barco Company

($169,008+$14,992+$8,900) / $450,540

$192,900 / $450,540 = 42.8%

Kyan Company

($228,683 + $25,017 + $12,000) / $561,100

$265,700 / $561,100 = 47.3%

(2A) Return on common stockholders equity

Return on common stockholders equity reports the amount of net income is earned attributed to common shareholders. The ratio is calculated by

Net Income - Preferred Dividends / Average Common Stockholders Equity.

For this calculation

Barco Company

$169,008 / ($210,000 +$210,000)/2 = $169,008 / $210,000 = 80.04%

Kyan Company

$228,683 / ($226,000+$226,000)/2 = $228,683 / $226,000 = 101.1%

(2B)Kyan Company would be most beneficial to invest in. The company reports a slightly higher profit margin, higher returns on common stockholders equity, and greater efficiencies on assets.