Question

Summary information from the financial statements of two companies competing in the same industry follows.
  

	Barco Company			Kyan Company					Barco Company			Kyan Company
Data from the current year-end balance sheets								Data from the current year’s income statement
Assets								Sales	$	770,000		$	880,200
Cash	$	19,500		$	34,000			Cost of goods sold		585,100			632,500
Accounts receivable, net		46,500			64,600			Interest expense		7,900			13,000
Merchandise inventory		84,440			132,500			Income tax expense		14,800			24,300
Prepaid expenses		5,000			6,950			Net income		162,200			210,400
Plant assets, net		290,000			304,400			Basic earnings per share		4.51			5.11
Total assets	$	445,440		$	542,450			Cash dividends per share		3.81			3.93
Liabilities and Equity								Beginning-of-year balance sheet data
Current liabilities	$	61,340		$	93,300			Accounts receivable, net	$	29,800		$	54,200
Long-term notes payable		80,800			101,000			Merchandise inventory		55,600			107,400
Common stock, $5 par value		180,000			206,000			Total assets		398,000			382,500
Retained earnings		123,300			142,150			Common stock, $5 par value		180,000			206,000
Total liabilities and equity	$	445,440		$	542,450			Retained earnings		98,300			93,600

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 (f) days' sales uncollected. (Do not round intermediate calculations.)
1b. Identify the company you consider to be the better short-term credit risk.

Complete this question by entering your answers in the tabs below. 1A Current Ratio || 1A Acid Test | 1A Acct Rec Ratio Turn 1A Invent Turnover 1A Days Sal in Inv 1A Days Sal Uncol 1B short term For both companies compute the current ratio. . (a) Company Choose Numerator: Current Ratio Choose Denominator: = Current Ratio Current ratio to 1 to 1 Barco Kyan

Answer 1

Current ratio indicates liquidity of company. It determines whether company has sufficient current assets available to pay its current liabilities
Company	Choose numerator	/	Choose denominator	=	Current ratio
	Current assets	/	Current liabilities	=	Current ratio
Barco	$155,440	/	$61,340	=	2.53	to 1
Kyan	$238,050	/	$93,300	=	2.55	to 1
b.
Acid test ratio
Company	Choose numerator	/	Choose denominator	=	Acid test ratio
	Current assets-Inventory-Prepaid expenses	/	Current liabilities	=	Acid test ratio
Barco	$66,000	/	$61,340	=	1.08	to 1
Kyan	$98,600	/	$93,300	=	1.06	to 1
c.
Accounts receivable turnover ratio
Company	Choose numerator	/	Choose denominator	=	Accounts receivable turnover ratio
	Sales	/	Average accounts receivable	=	Accounts receivable turnover ratio
Barco	$770,000	/	$38,150	=	20.18	times
Kyan	$880,200	/	$59,400	=	14.82	times
Average accounts receivable
Barco	(46500+29800)/2
Barco	$38,150
Kyan	(64600+54200)/2
Kyan	$59,400
d.
Inventory turnover ratio
Company	Choose numerator	/	Choose denominator	=	Inventory turnover ratio
	Cost of goods sold	/	Average inventory	=	Inventory turnover ratio
Barco	$585,100	/	$70,020	=	8.36	times
Kyan	$632,500	/	$119,950	=	5.27	times
Average inventory
Barco	(84440+55600)/2
Barco	$70,020
Kyan	(132500+107400)/2
Kyan	$119,950
e.
Days' sales in inventory
Company	Choose numerator	/	Choose denominator	*	Days	=	Days' sales uncollected
	Average inventory	/	Cost of goods sold	*	365	=	Days' sales uncollected
Barco	$70,020	/	$585,100	*	365	=	43.68	days
Kyan	$119,950	/	$632,500	*	365	=	69.22	days
f.
Days' sales uncollected
Company	Choose numerator	/	Choose denominator	*	Days	=	Days' sales uncollected
	Average receivables	/	Sales	*	365	=	Days' sales uncollected
Barco	$38,150	/	$770,000	*	365	=	18.08	days
Kyan	$59,400	/	$880,200	*	365	=	24.63	days
1B.
Current ratio of Kyan is higher than Barco while acid test ratio of Barco is slightly higher than that of Kyan
Accounts receivable and inventory turnover of Barco is better than kyan which indicates better short term liquidity.
Barco collects cash faster then Kyan and inventory converted is faster than kyan
Thus, based on above liquidity ratios better short term credit risk company is Barco.