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Problem 13-5A Comparative ratio analysis LO 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	$	780,000		$	924,200
Cash	$	20,500		$	31,000			Cost of goods sold		589,100			648,500
Accounts receivable, net		33,400			58,400			Interest expense		7,600			15,000
Merchandise inventory		84,840			138,500			Income tax expense		14,992			25,514
Prepaid expenses		6,000			7,550			Net income		168,308			235,186
Plant assets, net		330,000			313,400			Basic earnings per share		4.43			5.20
Total assets	$	474,740		$	548,850			Cash dividends per share		3.81			4.01
Liabilities and Equity								Beginning-of-year balance sheet data
Current liabilities	$	62,340		$	96,300			Accounts receivable, net	$	31,800		$	53,200
Long-term notes payable		83,800			115,000			Merchandise inventory		57,600			115,400
Common stock, $5 par value		190,000			226,000			Total assets		418,000			412,500
Retained earnings		138,600			111,550			Common stock, $5 par value		190,000			226,000
Total liabilities and equity	$	474,740		$	548,850			Retained earnings		115,072			57,616

Problem 13-5A Part 1

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

(1)

current ratio = current assets/current liabilities

= (cash + accounts receivable + merchandise inventory + prepaid expenses)/current liabilities

for Barco company,

= ($20500 + $33400 + $84840 + $6000)/$62340

= 2.32

for Kyan company,

= ($31000 + $58400 + $138500 + $7550)/$96300

= 2.44

(2)

current ratio = (cash + accounts receivable)/current liabilities

for Barco company,

= ($20500 + $33400)/$62340

= 0.86

for Kyan company,

= ($31000 + $58400)/$96300

= 0.93

(3)

Accounts receivable turnover = net credit sales/average accounts receivable

for Barco company,

= $780000/{($33400 + $31800)/2}

= 23.93 times

for Kyan company,

= $924200/{($58400 + $53200)/2}

= 16.56 times

(4)

inventory turnover = cost of goods sold/average inventory

for Barco company,

= $589100/{($84840 + $57600)/2}

= 8. 27 times

for Kyan company,

= $648500/{($138500 + $115400)/2}

= 5.11 times

(5)

days’ sales in inventory = 365/average inventory

for Barco company,

= 365/8.27 = 44.14 days

for Kyan company,

= 365/5.11 = 71.43 days

(6)

days’ sales uncollected = 365/average accounts receivable

for Barco company,

= 365/23.93 = 15.25 days

for Kyan company,

= 365/16.56 = 22.04