Question

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	$	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.

Answer 1

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.