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Problem 13-5A Comparative ratio analysis LO P3 [The following information applies to the questions displayed below.]...

Problem 13-5A Comparative ratio analysis LO P3

[The following information applies to the questions displayed below.]

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 $ 911,200
Cash $ 19,000 $ 34,000 Cost of goods sold 584,100 644,500
Accounts receivable, net 33,400 54,400 Interest expense 8,200 10,000
Merchandise inventory 84,340 140,500 Income tax expense 14,800 25,155
Prepaid expenses 5,300 7,750 Net income 162,900 231,545
Plant assets, net 350,000 307,400 Basic earnings per share 3.70 5.12
Total assets $ 492,040 $ 544,050 Cash dividends per share 3.78 3.92
Liabilities and Equity Beginning-of-year balance sheet data
Current liabilities $ 60,340 $ 104,300 Accounts receivable, net $ 26,800 $ 52,200
Long-term notes payable 81,800 107,000 Merchandise inventory 55,600 107,400
Common stock, $5 par value 220,000 226,000 Total assets 418,000 402,500
Retained earnings 129,900 106,750 Common stock, $5 par value 220,000 226,000
Total liabilities and equity $ 492,040 $ 544,050 Retained earnings 133,320 52,389

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.

Solutions

Expert Solution

Ans. 1 a *Calculations for total current assets:
Assets: Bacro company Kyan company
Cash $19,000 $34,000
Accounts receivables $33,400 $54,400
Merchandise inventory $84,340 $140,500
Prepaid expenses $5,300 $7,750
Total current assets (a) $142,040 $236,650
Ans. 1 a - a Current ratio   =   Total current assets / Total current liabilities
Bacro $142,440 / $60,340 2.36 : 1
Kyan $236,650 / $104,300 2.27 : 1
Ans. 1 a - b Acid test ratio   =   (Total current assets - Inventory - Prepaid expenses) / Total current liabilities
Bacro ($142,440 - $84,340 - $5,300) / $60,340 0.88 : 1
Kyan ($236,650 - $140,500 - $7,750) / $104,300 0.85 : 1
Ans. 1 a - c Accounts receivable turnover = Net credit sales / Average receivables
Bacro $770,000 / $30,100 25.58 times
Kyan $911,200 / $52,800 17.26 times
*Average receivable = (Beginning accounts receivables + Ending accounts receivables) / 2
Bacro ($26,800 + $33,400) / 2 $30,100
Kyan ($51,200 + $54,400) / 2 $52,800
Ans. 1 a - d Inventory turnover = Cost of goods sold / Average Inventory
Bacro $584,100 / $69,970 8.35 times
Kyan $644,500 / $123,950 5.20 times
*Average inventory = (Beginning inventory + Ending inventory) / 2
Bacro ($55,600 + $84,340) / 2 $69,970
Kyan ($107,400 + $140,500) / 2 $123,950
Ans. 1 a - e Days sales in inventory = No. of days in year / Inventory turnover ratio
Bacro 365 / 8.35 43.71 days
Kyan 365 / 5.20 70.19 days
Ans. 1 a - f Days sales uncollected = No. of days in year / Accounts receivable turnover ratio
Bacro 365 / 25.58 14.27 days
Kyan 365 / 17.26 21.15 days
Ans. 1 b Both companies have approximately equal current and quick ratios so these ratios can not be used
for the measure of short term credit risk.
Besides this, Bacro company takes less time to collect its receivables and turn its inventory so this company
is considered to have a better short term credit risk.

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