Question

Problem 13-5A Comparative ratio analysis LO A1, 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		$	880,200
Cash	$	19,500		$	34,000			Cost of goods sold		585,100			632,500
Accounts receivable, net		37,400			57,400			Interest expense		7,900			13,000
Current notes receivable (trade)		9,100			7,200			Income tax expense		14,800			24,300
Merchandise inventory		84,440			132,500			Net income		162,200			210,400
Prepaid expenses		5,000			6,950			Basic earnings per share		4.51			5.11
Plant assets, net		290,000			304,400			Cash dividends per share		3.81			3.93
Total assets	$	445,440		$	542,450
								Beginning-of-year balance sheet data
Liabilities and Equity								Accounts receivable, net	$	29,800		$	54,200
Current liabilities	$	61,340		$	93,300			Current notes receivable (trade)		0			0
Long-term notes payable		80,800			101,000			Merchandise inventory		55,600			107,400
Common stock, $5 par value		180,000			206,000			Total assets		398,000			382,500
Retained earnings		123,300			142,150			Common stock, $5 par value		180,000			206,000
Total liabilities and equity	$	445,440		$	542,450			Retained earnings		98,300			93,600

Problem 13-5A Part 1

Required:
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 the better short-term credit risk.

Answer 1

Answer - Part - 1a.

(a) -- Current ratio -

Company	Numerator	/	Denominator
	Current assets	/	Current liabilities	=	Current ratio
Barco	Total assets - Net plant assets = $445440 - $290000 = $155440	/	$61340 [Given]	=	2.5 to 1
Kyan	Total assets - Net plant assets = $542450 - $304400 = $238050	/	$93300 [Given]	=	2.6 to 1

.

(b) -- Acid-test ratio -

Company	Numerator	/	Denominator
	Cash + Short-term investments + Net current receivables	/	Current liabilities	=	Acid-test ratio
Barco	$19500 + 0 + $37400 + $9100 = $66000	/	$61340 [Given]	=	1.1 to 1
Kyan	$34000 + 0 + $57400 + $7200 = $98600	/	$93300 [Given]	=	1.1 to 1

.

(c) -- Accounts receivable turnover -

Company	Numerator	/	Denominator
	Net sales	/	Average accounts receivable, net	=	Accounts receivable turnover
Barco	$770000 [Given]	/	($37400 + $9100 + $29800) / 2 = $38150	=	20.2 times
Kyan	$880200 [Given]	/	($57400 + $7200 + $54200) / 2 = $59400	=	14.8 times

.

(d) -- Inventory turnover -

Company	Numerator	/	Denominator
	Cost of goods sold	/	Average inventory	=	Inventory turnover
Barco	$585100 [Given]	/	($55600 + $84440) / 2 = $70020	=	8.4 times
Kyan	$632500 [Given]	/	($107400 + $132500) / 2 = $119950	=	5.3 times

.

(e) -- Days' sales in inventory -

Company	Numerator	/	Denominator	X	Days
	Merchandise inventory	/	Cost of goods sold	X	365	=	Days' sales in inventory
Barco	$84440 [Given]	/	$585100 [Given]	X	365	=	52.7 days
Kyan	$132500 [Given]	/	$632500 [Given]	X	365	=	76.5 days

.

(f) -- Days' sales uncollected -

Company	Numerator	/	Denominator	X	Days
	Current receivables, net	/	Net sales	X	365	=	Days' sales uncollected
Barco	$37400 + $9100 = $46500	/	$770000 [Given]	X	365	=	22.0 days
Kyan	$57400 + $7200 = $64600	/	$880200 [Given]	X	365	=	26.8 days

.

Part -1b. -- Identify the company you consider to be the better short-term credit risk.

Answer - Barco Company.