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	$	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.

Answer 1

				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

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