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		$	919,200
Cash	$	21,000		$	37,000			Cost of goods sold		588,100			642,500
Accounts receivable, net		39,400			54,400			Interest expense		8,100			19,000
Current notes receivable (trade)		9,200			7,200			Income tax expense		14,992			25,376
Merchandise inventory		84,340			132,500			Net income		168,808			232,324
Prepaid expenses		5,500			7,600			Basic earnings per share		4.22			4.92
Plant assets, net		340,000			310,400			Cash dividends per share		3.72			3.95
Total assets	$	499,440		$	549,100
								Beginning-of-year balance sheet data
Liabilities and Equity								Accounts receivable, net	$	27,800		$	51,200
Current liabilities	$	61,340		$	92,300			Current notes receivable (trade)		0			0
Long-term notes payable		80,800			105,000			Merchandise inventory		65,600			109,400
Common stock, $5 par value		200,000			236,000			Total assets		418,000			382,500
Retained earnings		157,300			115,800			Common stock, $5 par value		200,000			236,000
Total liabilities and equity	$	499,440		$	549,100			Retained earnings		137,292			69,916

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 better short-term credit risk.

2a. For both companies compute the (a) profit margin ratio, (b) total asset turnover, (c) return on total assets, and (d) return on common stockholders’ equity. Assuming that share and each company’s stock can be purchased at $90 per share, compute their (e) price-earnings ratios and (f) dividend yields. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
2b. Identify which company’s stock you would recommend as the better investment.

Answer 1

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Income Statement	Barco	Kyan		Answer 1 a	Barco	Kyan
Sales	780,000.00	919,200.00		Current Ratio	2.6	2.6
Cost of goods sold	588,100.00	642,500.00		Current Assets/Current Liabilities
Gross Profit	191,900.00	276,700.00
Interest Expense	8,100.00	19,000.00		Acid Test Ratio	1.1	1.1
Income before taxes	183,800.00	257,700.00		Quick Assets/Current Liabilities
Income tax expense	14,992.00	25,376.00
Net Income	168,808.00	232,324.00		Accounts Receivables Turnover	20.4	16.2
Basic Earnings per share	4.22	4.92		Sales Revenue/ Average Receivable
Cash Dividends per share	3.72	3.95
				Inventory Turnover	7.8	5.3
Balance Sheets				Cost of goods sold/Average Inventory
Assets	Barco	Kyan
Current Assets				Days sales in Inventory	46.5	68.7
Cash	21,000.00	37,000.00		365/Inventory Turnover
Accounts Receivable (net)	39,400.00	54,400.00
Current Notes Receivable (trade)	9,200.00	7,200.00		Number of days sales uncollected	22.7	24.5
Merchandise Inventory	84,340.00	132,500.00		Total Receivables/Sales*365 days
Prepaid Expenses	5,500.00	7,600.00
Total Current Assets	159,440.00	238,700.00		Answer 1 b
Plant assets, net	340,000.00	310,400.00		Remarks- Barco has better short term credit risk because all of the above ratios are better and more improved than Kyan.
Total Assets	499,440.00	549,100.00
				Answer 2 a
Liabilities & Stockholders' Equity				Profit margin %	21.6%	25.3%
Liabilities				Net Income/Net Sales
Current Liabilities	61,340.00	92,300.00
Long Term Note payable	80,800.00	105,000.00		Total Assets Turnover Ratio	1.7	2.0
Total Liabilities	142,140.00	197,300.00		Sales Revenue/Average Assets
Common Stock	200,000.00	236,000.00
Retained Earnings	157,300.00	115,800.00		Return on Total Assets	33.8%	42.3%
Total Stockholders' Equity	357,300.00	351,800.00		Net Income/Total Assets
Total Liabilities & Stockholders' Equity	499,440.00	549,100.00
				Return on Common Stock holders Equity	47.2%	66.0%
Total Current Assets	159,440.00	238,700.00		Net Income/Common Stock holders Equity
Less:
Inventory	84,340.00	132,500.00		Price Earnings Ratio	17.8	15.2
Prepaid Expense	5,500.00	7,600.00		Market Price Per Share/ Earnings Per share on Common Stock
Quick Assets	69,600.00	98,600.00
				Dividend Yield	5.0%	5.3%
				Dividend Per share on Common Stock/ Market Price Per Share
				Answer 2 b
				Remarks- Kyan is a better investment opportunity because all of the above ratios are better and more improved than Barco.
Barco	Current	Last Year		Kyan	Current	Last Year
Accounts Receivable (net)	39,400.00	27,800.00		Accounts Receivable (net)	54,400.00	52,200.00
Current Notes Receivable (trade)	9,200.00	-		Current Notes Receivable (trade)	7,200.00	-
Average Receivable (net)	38,200.00			Average Receivable (net)	56,900.00
Merchandise Inventory	84,340.00	65,600.00		Merchandise Inventory	132,500.00	109,400.00
Average Inventory	74,970.00			Average Inventory	120,950.00
Total assets	499,440.00	418,000.00		Total assets	549,100.00	382,500.00
Average assets	458,720.00			Average assets	465,800.00