Question

Required information [The following information applies to the questions displayed below.) Summary information from the financial statements of two companies competing in the same industry follows. Barco Kyan Company Company Data from the current year-end balance sheets Assets Cash $ 18,000 $ 35,000 Accounts receivable, net 40,400 54,400 Merchandise inventory 85,040 134,500 Prepaid expenses 5,500 7,750 Plant assets, net 320,000 312,400 Total assets $ 468,940 $544,050 Barco Kyan Company Company Data from the current year's income statement Sales $800,000 $882,200 Cost of goods sold 595,100 648,500 Interest expense 9,000 11,000 Income tax expense 15,377 24,1355 Net income 180,523 198,345 Basic earnings per share 4.30 4.20 Cash dividends per share 3.99 3.72 Liabilities and Equity Current liabilities Long-term notes payable Common stock, $5 par value Retained earnings Total liabilities and equity $ 71,340 $ 91,300 84,800 103,000 210,000 236,000 102,800 113,750 $ 468,940 $544,050 Beginning-of-year balance sheet data Accounts receivable, net Merchandise inventory Total assets Common stock, $5 par value Retained earnings $ 29,800 $ 57,200 53,600 111,400 408,000 392,500 210,000 236,000 78,517 103,733 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

	1A	Current ratio=	Current assets	/	Current liability
		Barco	$148,940	/	$71,340	2.09
		Kyan	$231,650	/	$91,300	2.54
		Acid Test ratio =	(Current assets - Prepaid expenses - merchandise inventory)	/	Current liability
			(Cash + Account receivable)	/	Current liability
		Barco	(18000+40400)	/	$71,340
		Barco	58400	/	$71,340	0.82
		Kyan	(35000+54400)	/	$91,300
		Kyan	89400	/	$91,300	0.98
		Accounts receivables turnover	Net Annual Credit Sales		((Beginning Accounts Receivable + Ending Accounts Receivable) / 2)
		Barco	800,000	/	((29,800+40,400)/2)	22.79	Times
		Kyan	882,200	/	(57200+54400)/2	15.81	Times
		Inventory turnover	Cost of Goods Sold	/	((Beginning Inventory + Ending Inventory) / 2)
		Barco	595,100	/	(53,600+85,040)/2	8.58
		Kyan	648,500	/	(111,400+134,500)/2	5.27
		Computation of days sales inventory	Inventory	/	COGS	x	365	=	Days sales inventory
		Barco	85040	/	595100	x	365	=	52.16
		Kyan	134500	/	648500	x	365	=	75.70
		Days sales uncollectable
			Account receivable	/	Net sales	x	365	=	Days sales uncollected
		Barco	40400	/	800000	x	365	=	18.43
		Kyan	54400	/	882200	x	365	=	22.51
			Kyan has better short term credit risk it's current ratio and acid test ratio is higher.