Question

The following are summaries from the income statements and balance sheets of Aqua Tank, Inc. and Glider Tube, Inc.

(PLEASE SHOW/EXPLAIN YOUR WORK SO IT IS EASIER TO UNDERSTAND)

AQUA TANK, INC. Consolidated Balance Sheets (in millions)
	May 31
	2014	2013
Assets
Current assets:
Cash and cash equivalents	$634.0	$575.5
Accounts receivable, net of allowance	2,301.1	1,804.1
Inventories	1,564.9	1,373.8
Other current assets	389.9	401.3
Total current assets	4,889.9	4,154.7
Property, plant, and equipment, net	1,688.8	1614.5
Other long-term assets	613.2	670.8
Total assets	$7,191.9	$6,440.0
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$205.7	$55.3
Notes payable	75.4	425.2
Accounts payable	572.7	504.4
Accrued liabilities	1,054.2	765.3
Income taxes payable	137.2	83.0
Total current liabilities	2,045.2	1,833.2
Long-term liabilities	928.0	767.8
Total liabilities	2,973.2	2,601.0
Stockholders’ equity:
Common stock	2.8	2.8
Contributed capital in excess of par value	589.0	538.7
Unearned stock compensation	(2.6)	(5.1)
Accumulated other comprehensive loss	(239.7)	(192.4)
Retained earnings	3,869.2	3,495.0
Total stockholders’ equity	4,218.7	3,839.0
Total liabilities and stockholders’ equity	$ 7,191.9	$ 6,440.0

AQUA TANK, INC. Consolidated Statement of Income May 31, 2014 (in millions)
Revenues	$ 12,697.0
Cost of sales	8,013.6
Gross profit	4,683.4
Operating expenses	3,037.6
Operating income	1,645.8
Interest expense	52.9
Other revenues and expenses	79.9
Income before tax	1,513.0
Income taxes	514.4
Income before effect of accounting change	998.6
Cumulative effect of accounting change, net of tax	366.1
Net income	$ 632.5

GLIDER TUBE, INC. Consolidated Balance Sheets (in millions)
	Jan. 31, 2014	Jan. 31, 2013
Assets
Current assets:
Cash and cash equivalents	$34.5	$22.2
Accounts receivable, net of allowance	15.5	14.7
Inventories	29.2	28.4
Other current assets	4.5	4.2
Total current assets	83.7	69.5
Property, plant, and equipment, net	6.7	7.0
Other long-term assets	1.5	1.5
Total assets	$91.9	$78.0
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$ 8.5	$ 6.6
Accrued liabilities	7.8	5.6
Total current liabilities	16.3	12.2
Long-term liabilities	2.5	2.6
Total liabilities	18.8	14.8
Stockholders’ equity:
Common stock	2.3	2.3
Contributed capital in excess of par value	20.2	17.4
Unearned stock compensation	(0.1)	(0.5)
Accumulated other comprehensive loss	(0.9)	(1.3)
Treasury stock	(5.4)	(5.4)
Retained earnings	57.0	50.7
Total stockholders’ equity	73.1	63.2
Total liabilities and stockholders’ equity	$91.9	$78.0

GLIDER TUBE, INC. Consolidated Statement of Income January 31, 2014 (in millions)
Revenues	$ 178.5
Cost of sales	132.3
Gross profit	46.2
Operating expenses	35.3
Operating income	10.9
Interest expense	0.4
Other (revenues) and expenses	(0.3)
Income before tax	10.8
Income taxes	4.5
Net income	$ 6.3

For both companies compute the following ratios for 2014:

(a) Current ratio
(b) Acid-test ratio
(c) Accounts receivable turnover
(d) Inventory turnover
(e) Days' sales in inventory
(f) Days' sales uncollected

Which company do you consider to be the better short-term credit risk? Explain.

(g) Profit margin ratio
(h) Return on total assets
(i) Return on common stockholders' equity

Which company do you consider having better profitability ratios?

Answer:

		Aqua Tank	Glider Tube
(a)	Current ratio
(b)	Acid-test ratio
(c)	Accounts receivable turnover
(d)	Inventory turnover
(e)	Days’ sales in inventory
(f)	Days’ sales uncollected

		Aqua Tank	Glider Tube
(g)	Profit margin ratio
(h)	Return on total assets
(c)	Return on common stockholders’ equity

Comment:

Comment:.

Answer 1

1. Current Ratio for Aqua Tank

= Current assets / Current liabilities

= 4889.9 / 2045.2

= 2.39

Current Ratio for Glider Tube

= Current assets / Current liabilities

= 83.7 / 16.3

= 5.13

2. Acid-test Ratio for Aqua Tank

= Quick (Liquid) assets / Current Liabilities

= (Cash&Equivalents+A/c Receivables) / Current Liabilities

= 2935.1 / 2045.2

= 1.43

Acid-Test Ratio for Glider Tube

= Quick (Liquid) assets / Current Liabilities

= (Cash&Equivalents+A/c Receivables) / Current Liabilities

= 50 / 16.3

= 3.06

3. Accounts Receivables Turnover for Aqua Tank

= Revenues / Average Accounts Receivables

= 12697.0 / (Beg Receivables+End Receivables / 2]

= 12697.0 / 2052.6

= 6.18

Accounts Receivables Turnover for Glider Tube

= Revenues / Average Accounts Receivables

= 178.5 / (Beg Receivables+End Receivables / 2]

= 178.5 / 15.1

= 11.82

4. Inventory Turnover for Aqua Tank

= Cost of sales / Average Inventory

= 8013.6 / [Beg Inventory+End Inventory / 2]

= 8013.6 / 1469.35

= 5.45

Inventory Turnover for Glider Tube

= Cost of sales / Average Inventory

= 132.3 / [Beg Inventory+End Inventory / 2]

= 132.3 / 28.8

= 4.59

5. Days' sales in inventory for Aqua Tank

= Average Inventory / Cost of sales X 365 days

= 1469.35 / 8013.6 x 365

= 66.9 days

Days' sales in inventory for Glider Tube

= Average Inventory / Cost of Sales x 365 days

= 28.8 / 132.2 x 365 days

= 79.5 days

6. Days' sales uncollected for Aqua Tank

= Average Receivables / Sales

= 2052.6 /12697.0 x 365 days

= 58.9 days

Days' sales in uncollected for Glider Tube

= Average Receivables / Sales

= 15.1 / 178.5

= 30.8 days

7. Profit margin ratio for Aqua Tank

= Gross Profit / Revenues

= 4683.4 / 12697.0

= 0.36

Profit margin ratio for Glider Tube

= Gross Profit / Revenues

= 46.2 / 178.5

= 0.25

8. Return on total assets for Aqua Tank

= Net income / Total assets

= 632.5 / 7191.9

= 0.08

Return on total assets for Glider Tube

= Net income / Total assets

= 6.3 / 91.9

= 0.06