Homework Answers
Answer
Memo # 1: The company I selected as better short term credit risk is West Inc.
Memo # 2: The company I selected as a better investment is East Inc.
Explanations:
Memo # 1:
- Current Ratio of West Inc. is 2.6 whereas Current Ratio of East Inc. is 2.3. The current ratio shows short term solvency. The higher the current ratio, the better it is. So, West Inc. is better.
- Acid test Ratio of West Inc. is 1.4 whereas Acid test Ratio of East Inc. is 1.2. Acid test ratio also shows short term solvency. The higher the Acid test ratio, the better it is for short term credit risk. So, West Inc. is better.
- Accounts receivable turnover of West Inc. is 8.8 times whereas Accounts receivable turnover of East Inc. is 8.4 times. Accounts receivable turnover shows the ratio of credit sales to debtors. The higher the Accounts receivable turnover, the better it is for short term credit risk. So, West Inc. is better. Similarly, the higher the inventory turnover, the better it is for short term credit risk. In that respect also, West Inc. is better.
- Day sales uncollected of West Inc. is 29.7 days whereas Day sales uncollected of East Inc. is 34.2 days. Day sales uncollected shows the days that are taken to collect debtors. The lower Day sales uncollected, the better it is for short term credit risk. So, West Inc. is better. Similarly, The lower the Day sales in inventory, the better it is for short term credit risk. In that respect also, West Inc. is better.
Memo # 2:
- Profit margin ratio of West Inc. is 2.8% whereas Profit margin Ratio of East Inc. is 3.2%. Profit margin ratio shows the profitability of the company. The higher the Profit margin ratio, the better it is. So, East Inc. is better.
- Return on Common shareholders’ equity of West Inc. is 4.1% whereas Return on Common shareholders’ equity of East Inc. is 4.6%. Return on Common shareholders’ equity shows the profitability of the company for the equity shareholders. The higher Return on Common shareholders’ equity, the better it is. So, East Inc. is better.
- Times interest earned of West Inc. is 2.2 times whereas Times interest earned of East Inc. is 2.6 times. Times interest earned shows the times that profit is to cover up interest. The higher the Times interest earned, the better it is for debenture holders. So, East Inc. is better.
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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...
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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
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14,800
24,300
Prepaid expenses
5,000
6,950
Net income
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of 2 Summary information from the financial statements of two companies competing in the same industry follows. Sales Barco Kyan Company Company Data from the current year-end balance sheets Assets Cash $ 22,500 $ 35,000 Accounts receivable, net 35,400 57.400 Merchandise inventory 84,840 128,500 Prepaid expenses 5.800 7,200 Plant annets, net 320,000 309, 400 Total anseta $468,540 $537,500 Barco Kyan Company Company Data from the current year's income statement $770,000 $879,200 cost of goods sold 587,100 32,500 Interest expense 8.400...
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