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.

Answer 1

a)			Current ratio
Company	Choose Numerator		/	Choose Denominator		=	Current ratio
	current assets		/	Current liabilities		=	Current ratio
Barco	155440		/	61,340		=	2.5
Kyan	238050		/	93,300		=	2.6
b)			Acid test ratio
Company	Choose Numerator					/	Choose Denominator		=	Current ratio
	Cash	+	short term investment	+	Current receivable	/	Current liabilities		=	Acid test ratio
Barco	19,500				46,500	/	61,340		=	1.1
Kyan	34,000				64,600	/	93,300		=	1.1
C)			Accounts Receivable Turnover
Company	Choose Numerator		/	Choose Denominator		=	Current ratio
	Net sales		/	Average account receivable,net		=	Accounts receivable turnover
Barco	770,000		/	38,150		=	20.2	times
Kyan	880200		/	59,400		=	14.8	times
d)			Inventory Turnover
Company	Choose Numerator		/	Choose Denominator		=	Current ratio
	Cost of goods sold		/	Average inventory		=	inventory turnover
Barco	585,100		/	70,020		=	8.4	times
Kyan	632500		/	119,950		=	5.3	times
e)			Days' sale in inventory
Company	Choose numerator		/	Choose Denominator		*	Days	=	Days' sales in inventory
	Merchandise inventory		/	Cost of goods sold		*	365	=	Days' sales in inventory
Barco	84,440		/	585,100			365	=	52.7	days
Kyan	132,500		/	632500			365	=	76.5	days
e)			Days' sale Uncollected
Company	Choose numerator		/	Choose Denominator		*	Days	=	Days' sales in inventory
	Current receivables,net		/	Net sales		*	365	=	Days' sale uncollected
Barco	46,500		/	770,000			365	=	22.0	days
Kyan	64,600		/	880200			365	=	26.8	days
Better short-term credit risk			Barco