Question

In: Accounting

Summary information from the financial statements of two companies competing in the same industry follows.   ...

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 46,500 64,600 Interest expense 7,900 13,000
Merchandise inventory 84,440 132,500 Income tax expense 14,800 24,300
Prepaid expenses 5,000 6,950 Net income 162,200 210,400
Plant assets, net 290,000 304,400 Basic earnings per share 4.51 5.11
Total assets $ 445,440 $ 542,450 Cash dividends per share 3.81 3.93
Liabilities and Equity Beginning-of-year balance sheet data
Current liabilities $ 61,340 $ 93,300 Accounts receivable, net $ 29,800 $ 54,200
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

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.

Solutions

Expert Solution

Barco Company Kyan Company
Cash $                           19,500 $                              34,000
Accounts receivable, net $                           46,500 $                              64,600
Merchandise inventory $                           84,440 $                            132,500
Prepaid expenses $                             5,000 $                                6,950
Current Assets $                          155,440 $                            238,050
(a) Current Ratio
Company Choose Numerator / Choose Denominator = Current Ratio
Current Assets / Current Liabilities = Current Ratio
Barco $                              155,440 / $                          61,340 =                                     2.53 to 1
Kyan $                              238,050 $                          93,300 =                                     2.55 to 1
Barco Company Kyan Company
Cash $                           19,500 $                              34,000
Accounts receivable, net $                           46,500 $                              64,600
Quick Assets $                           66,000 $                              98,600
(b) Acid Test Ratio
Company Choose Numerator / Choose Denominator = Current Ratio
Quick Assets / Current Liabilities = Current Ratio
Barco $                                66,000 / $                          61,340 =                                     1.08 to 1
Kyan $                                98,600 $                          93,300 =                                     1.06 to 1
Barco Company Kyan Company
a Beg. Bal. of Accounts receivable, net $                           29,800 $                              54,200
b End. Bal. of Accounts receivable, net $                           46,500 $                              64,600
c Average Accounts Receivable (a+b)/2 $                           38,150 $                              59,400
(c) Accounts Receivable Turnover Ratio
Company Choose Numerator / Choose Denominator = Accounts Receivable Turnover Ratio
Net Credit Sales / Average Accounts Receivable = Accounts Receivable Turnover Ratio
Barco $                              770,000 / $                          38,150 =                                   20.18 times
Kyan $                              880,200 / $                          59,400 =                                   14.82 times
Barco Company Kyan Company
a Beg. Bal. of Merchandise inventory $                           55,600 $                            107,400
b End. Bal. of Merchandise inventory $                           84,440 $                            132,500
c Average Inventory (a+b)/2 $                           70,020 $                            119,950
(d) Inventory Turnover Ratio
Company Choose Numerator / Choose Denominator = Inventory Turnover Ratio
Cost of Goods sold / Average Inventory = Inventory Turnover Ratio
Barco $                              585,100 / $                          70,020 =                                     8.36 times
Kyan $                              632,500 / $                        119,950 =                                     5.27 times
(e) Days' Sales in inventory
Company Choose Numerator / Choose Denominator = Days' Sales in inventory
Number of Days in a year / Inventory Turnover Ratio = Days' Sales in inventory
Barco                                         365 /                                  8.36 =                                   43.68 days
Kyan                                         365 /                                  5.27 =                                   69.22 days
(f) Days' Sales Uncollected
Company Choose Numerator / Choose Denominator = Days' Sales Uncollected
Number of Days in a year / Accounts Receivable Turnover Ratio = Days' Sales Uncollected
Barco                                         365 /                                20.18 =                                   18.08 days
Kyan                                         365 /                                14.82 =                                   24.63 days
1-B Better short term credit risk Barco

Feel free to ask any clarification, if required. Kindly provide feedback by thumbs up, if satisfied. It will be highly appreciated.
Thank you.


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