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	$	780,000		$	908,200
Cash	$	21,500		$	33,000			Cost of goods sold		591,100			634,500
Accounts receivable, net		35,400			60,400			Interest expense		8,100			14,000
Current notes receivable (trade)		9,400			8,000			Income tax expense		14,992			25,073
Merchandise inventory		84,740			128,500			Net income		165,808			234,627
Prepaid expenses		5,400			6,900			Basic earnings per share		4.15			5.43
Plant assets, net		320,000			308,400			Cash dividends per share		3.71			3.95
Total assets	$	476,440		$	545,200
								Beginning-of-year balance sheet data
Liabilities and Equity								Accounts receivable, net	$	27,800		$	53,200
Current liabilities	$	60,340		$	101,300			Current notes receivable (trade)		0			0
Long-term notes payable		84,800			101,000			Merchandise inventory		63,600			107,400
Common stock, $5 par value		200,000			216,000			Total assets		388,000			412,500
Retained earnings		131,300			126,900			Common stock, $5 par value		200,000			216,000
Total liabilities and equity	$	476,440		$	545,200			Retained earnings		113,892			62,913

1a. For both companies compute the (a) current ratio, (b) acid-test ratio, (c) accounts (including notes) 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 better short-term credit risk.

Answer 1

Ans. 1 a
	*Calculations for total current assets:
	Assets:	Bacro company	Kyan company
	Cash	$21,500	$33,000
	Accounts receivables	$35,400	$60,400
	Current notes receivable	$9,400	$8,000
	Merchandise inventory	$84,740	$128,500
	Prepaid expenses	$5,400	$6,900
	Total current assets (a)	$156,440	$236,800
Ans. 1 a - a	Current ratio   =   Total current assets / Total current liabilities
	Bacro	$156,440 / $60,340	2.59 : 1
	Kyan	$236,800 / $101,300	2.34 : 1
Ans. 1 a - b	Acid test ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
	Bacro	($156,440 - $84,740 - $5,400) / $60,340		1.099 : 1
	Kyan	($236,800 - $128,500 - $6,900) / $101,300		1.000 : 1
Ans. 1 a - c	Accounts receivable turnover = Net credit sales / Average receivables
	Bacro	$780,000 / $36,300	21.49	times
	Kyan	$908,200 / $60,800	14.94	times
	*Average receivable = (Beginning accounts and notes receivables + Ending accounts and notes receivables) / 2
	Bacro	($35,400 + $9,400 + $27,800 + $0) / 2		$36,300
	Kyan	($60,400 + $8,000 + $53,200 + $0) / 2		$60,800
Ans. 1 a - d	Inventory turnover = Cost of goods sold / Average Inventory
	Bacro	$591,100 / $74,170	7.97	times
	Kyan	$634,500 / $117,950	5.38	times
	*Average inventory = (Beginning inventory + Ending inventory) / 2
	Bacro	($63,600 + $84,740) / 2	$74,170
	Kyan	($107,400 + $128,500) / 2	$117,950
Ans. 1 a - e	Days sales in inventory = No. of days in year / Inventory turnover ratio
	Bacro	365 / 7.97	45.80	days
	Kyan	365 / 5.38	67.84	days
Ans. 1 a - f	Days sales uncollected = No. of days in year / Accounts receivable turnover ratio
	Bacro	365 / 21.49	16.98	days
	Kyan	365 / 14.94	24.43	days
Ans. 1 b	Both companies have approximately equal current and quick ratios so these ratios can not be used
	for the measure of short term credit risk.
	But, Bacro company takes less time to collect its receivables and turn its inventory so this company
	is considered to have a better short term credit risk.