Question

Problem 13-5A Comparative ratio analysis LO P3

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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		$	890,200
Cash	$	19,500		$	32,000			Cost of goods sold		590,100			642,500
Accounts receivable, net		36,400			51,400			Interest expense		9,300			17,000
Merchandise inventory		84,840			134,500			Income tax expense		14,800			24,576
Prepaid expenses		5,300			7,450			Net income		155,800			206,124
Plant assets, net		320,000			309,400			Basic earnings per share		4.33			5.00
Total assets	$	466,040		$	534,750			Cash dividends per share		3.77			3.95
Liabilities and Equity								Beginning-of-year balance sheet data
Current liabilities	$	60,340		$	92,300			Accounts receivable, net	$	27,800		$	58,200
Long-term notes payable		80,800			101,000			Merchandise inventory		55,600			109,400
Common stock, $5 par value		180,000			206,000			Total assets		458,000			412,500
Retained earnings		144,900			135,450			Common stock, $5 par value		180,000			206,000
Total liabilities and equity	$	466,040		$	534,750			Retained earnings		124,820			92,066

Problem 13-5A Part 1

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

Ans. 1 a
	*Calculations for total current assets:
	Assets:	Bacro company	Kyan company
	Cash	$19,500	$32,000
	Accounts receivables	$36,400	$51,400
	Merchandise inventory	$84,840	$134,500
	Prepaid expenses	$5,300	$7,450
	Total current assets (a)	$146,040	$225,350
Ans. 1 a - a	Current ratio   =   Total current assets / Total current liabilities
	Bacro	$146,040 / $60,340	2.42 : 1
	Kyan	$225,350 / $92,300	2.44 : 1
Ans. 1 a - b	Acid test ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
	Bacro	($146,040 - $84,840 - $5,300) / $60,340		0.93 : 1
	Kyan	($225,350 - $134,500 - $7,450) / $92,300		0.90 : 1
Ans. 1 a - c	Accounts receivable turnover = Net credit sales / Average receivables
	Bacro	$770,000 / $32,100	23.99	times
	Kyan	$890,200 / $54,800	16.24	times
	*Average receivable = (Beginning receivables + Ending receivables) / 2
	Bacro	($27,800 + $36,400) / 2	$32,100
	Kyan	($58,200 + $51,400) / 2	$54,800
Ans. 1 a - d	Inventory turnover = Cost of goods sold / Average Inventory
	Bacro	$590,100 / $70,220	8.40	times
	Kyan	$642,500 / $121,950	5.27	times
	*Average inventory = (Beginning inventory + Ending inventory) / 2
	Bacro	($55,600 + $84,840) / 2	$70,220
	Kyan	($109,400 + $134,500) / 2	$121,950
Ans. 1 a - e	Days sales in inventory = No. of days in year / Inventory turnover ratio
	Bacro	365 / 8.40	43.45	days
	Kyan	365 / 5.27	69.26	days
Ans. 1 a - f	Days sales uncollected = No. of days in year / Accounts receivable turnover ratio
	Bacro	365 / 23.99	15.21	days
	Kyan	365 / 16.24	22.48	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 be a better short term credit risk.