Required informationSkip to question[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 CompanyData from the current year-end balance sheets     Data from the current year’s income statement    Assets     Sales $ 780,000 $ 907,200Cash $ 19,500 $ 33,000 Cost of goods sold 590,100 630,500Accounts receivable, net 36,400 59,400 Interest expense 8,000 13,000Merchandise inventory 84,240 130,500 Income tax expense 14,992 25,045Prepaid expenses 5,600 7,500 Net income 166,908 238,655Plant assets, net 320,000 305,400 Basic earnings per share 4.17 5.79Total assets $ 465,740 $ 535,800 Cash dividends per share 3.74 4.03Liabilities and Equity     Beginning-of-year balance sheet data    Current liabilities $ 71,340 $ 103,300 Accounts receivable, net $ 30,800 $ 55,200Long-term notes payable 78,800 105,000 Merchandise inventory 63,600 105,400Common stock, $5 par value 200,000 206,000 Total assets 448,000 392,500Retained earnings 115,600 121,500 Common stock, $5 par value 200,000 206,000Total liabilities and equity $ 465,740 $ 535,800 Retained earnings 98,292 48,881Required: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.Note: Do not round intermediate calculations.1b. Identify the company you consider to be the better short-term credit risk.

1a. To compute the required ratios for both companies, we will use the following formulas:

(a) Current Ratio = Current Assets / Current Liabilities (b) Acid-Test Ratio = (Cash + Accounts Receivable + Short-term Investments) / Current Liabilities (c) Accounts Receivable Turnover = Net Sales / Average Accounts Receivable (d) Inventory Turnover = Cost of Goods Sold / Average Inventory (e) Days’ Sales in Inventory = 365 / Inventory Turnover (f) Days’ Sales Uncollected = (Accounts Receivable / Net Sales) * 365

Let's calculate these step by step for both Barco Company and Kyan Company.

Barco Company

Current Assets:

• Cash: $19,500
• Accounts Receivable: $36,400
• Merchandise Inventory: $84,240
• Prepaid Expenses: $5,600
• Total Current Assets: $145,740

Current Liabilities:

• Current Liabilities: $71,340

Current Ratio: $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{145,740}{71,340} \approx 2.04$

Acid-Test Ratio: $\text{Acid-Test Ratio} = \frac{\text{Cash} + \text{Accounts Receivable}}{\text{Current Liabilities}} = \frac{19,500 + 36,400}{71,340} \approx 0.79$

Accounts Receivable Turnover: $\text{Average Accounts Receivable} = \frac{30,800 + 36,400}{2} = 33,600$ $\text{Accounts Receivable Turnover} = \frac{780,000}{33,600} \approx 23.21$

Inventory Turnover: $\text{Average Inventory} = \frac{63,600 + 84,240}{2} = 73,920$ $\text{Inventory Turnover} = \frac{590,100}{73,920} \approx 7.98$

Days’ Sales in Inventory: $\text{Days’ Sales in Inventory} = \frac{365}{7.98} \approx 45.74$

Days’ Sales Uncollected: $\text{Days’ Sales Uncollected} = \frac{36,400}{780,000} \times 365 \approx 17.05$

Kyan Company

Current Assets:

• Cash: $33,000
• Accounts Receivable: $59,400
• Merchandise Inventory: $130,500
• Prepaid Expenses: $7,500
• Total Current Assets: $230,400

Current Liabilities:

• Current Liabilities: $103,300

Current Ratio: $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{230,400}{103,300} \approx 2.23$

Acid-Test Ratio: $\text{Acid-Test Ratio} = \frac{\text{Cash} + \text{Accounts Receivable}}{\text{Current Liabilities}} = \frac{33,000 + 59,400}{103,300} \approx 0.90$

Accounts Receivable Turnover: $\text{Average Accounts Receivable} = \frac{55,200 + 59,400}{2} = 57,300$ $\text{Accounts Receivable Turnover} = \frac{907,200}{57,300} \approx 15.83$

Inventory Turnover: $\text{Average Inventory} = \frac{105,400 + 130,500}{2} = 117,950$ $\text{Inventory Turnover} = \frac{630,500}{117,950} \approx 5.34$

Days’ Sales in Inventory: $\text{Days’ Sales in Inventory} = \frac{365}{5.34} \approx 68.35$

Days’ Sales Uncollected: $\text{Days’ Sales Uncollected} = \frac{59,400}{907,200} \times 365 \approx 23.90$

1b. Identifying the Better Short-Term Credit Risk:

Based on the calculated ratios:

• Current Ratio: Kyan Company (2.23) is slightly better than Barco Company (2.04).
• Acid-Test Ratio: Kyan Company (0.90) is better than Barco Company (0.79).
• Accounts Receivable Turnover: Barco Company (23.21) is better than Kyan Company (15.83).
• Inventory Turnover: Barco Company (7.98) is better than Kyan Company (5.34).
• Days’ Sales in Inventory: Barco Company (45.74 days) is better than Kyan Company (68.35 days).
• Days’ Sales Uncollected: Barco Company (17.05 days) is better than Kyan Company (23.90 days).

Overall, Barco Company appears to be the better short-term credit risk due to its higher efficiency in managing receivables and inventory, despite Kyan Company having slightly better liquidity ratios.

1a. To compute the required ratios for both Barco Company and Kyan Company, we will use the following formulas:

(a) Current Ratio = Current Assets / Current Liabilities (b) Acid-Test Ratio = (Cash + Accounts Receivable + Short-term Investments) / Current Liabilities (c) Accounts Receivable Turnover = Net Sales / Average Accounts Receivable (d) Inventory Turnover = Cost of Goods Sold / Average Inventory (e) Days’ Sales in Inventory = 365 / Inventory Turnover (f) Days’ Sales Uncollected = (Accounts Receivable / Net Sales) * 365

Let's calculate each ratio step by step:

Barco Company

Current Assets:

• Cash: $19,500
• Accounts Receivable: $36,400
• Merchandise Inventory: $84,240
• Prepaid Expenses: $5,600
• Total Current Assets: $145,740

Current Liabilities:

• Current Liabilities: $71,340

Current Ratio: $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{145,740}{71,340} \approx 2.04$

Acid-Test Ratio: $\text{Acid-Test Ratio} = \frac{\text{Cash} + \text{Accounts Receivable}}{\text{Current Liabilities}} = \frac{19,500 + 36,400}{71,340} \approx 0.79$

Accounts Receivable Turnover: $\text{Average Accounts Receivable} = \frac{30,800 + 36,400}{2} = 33,600$ $\text{Accounts Receivable Turnover} = \frac{\text{Net Sales}}{\text{Average Accounts Receivable}} = \frac{780,000}{33,600} \approx 23.21$

Inventory Turnover: $\text{Average Inventory} = \frac{63,600 + 84,240}{2} = 73,920$ $\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} = \frac{590,100}{73,920} \approx 7.98$

Days’ Sales in Inventory: $\text{Days’ Sales in Inventory} = \frac{365}{\text{Inventory Turnover}} = \frac{365}{7.98} \approx 45.74$

Days’ Sales Uncollected: $\text{Days’ Sales Uncollected} = \left( \frac{\text{Accounts Receivable}}{\text{Net Sales}} \right) \times 365 = \left( \frac{36,400}{780,000} \right) \times 365 \approx 17.04$

Kyan Company

Current Assets:

• Cash: $33,000
• Accounts Receivable: $59,400
• Merchandise Inventory: $130,500
• Prepaid Expenses: $7,500
• Total Current Assets: $230,400

Current Liabilities:

• Current Liabilities: $103,300

Current Ratio: $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{230,400}{103,300} \approx 2.23$

Acid-Test Ratio: $\text{Acid-Test Ratio} = \frac{\text{Cash} + \text{Accounts Receivable}}{\text{Current Liabilities}} = \frac{33,000 + 59,400}{103,300} \approx 0.90$

Accounts Receivable Turnover: $\text{Average Accounts Receivable} = \frac{55,200 + 59,400}{2} = 57,300$ $\text{Accounts Receivable Turnover} = \frac{\text{Net Sales}}{\text{Average Accounts Receivable}} = \frac{907,200}{57,300} \approx 15.83$

Inventory Turnover: $\text{Average Inventory} = \frac{105,400 + 130,500}{2} = 117,950$ $\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} = \frac{630,500}{117,950} \approx 5.34$

Days’ Sales in Inventory: $\text{Days’ Sales in Inventory} = \frac{365}{\text{Inventory Turnover}} = \frac{365}{5.34} \approx 68.35$

Days’ Sales Uncollected: $\text{Days’ Sales Uncollected} = \left( \frac{\text{Accounts Receivable}}{\text{Net Sales}} \right) \times 365 = \left( \frac{59,400}{907,200} \right) \times 365 \approx 23.91$

1b. Identify the company you consider to be the better short-term credit risk:

Based on the calculated ratios, Kyan Company has a higher current ratio (2.23 vs. 2.04) and a higher acid-test ratio (0.90 vs. 0.79), indicating better liquidity. However, Barco Company has better efficiency in managing its receivables and inventory, as indicated by higher accounts receivable turnover (23.21 vs. 15.83) and inventory turnover (7.98 vs. 5.34), as well as lower days’ sales in inventory (45.74 vs. 68.35) and days’ sales uncollected (17.04 vs. 23.91).

Considering both liquidity and efficiency, Barco Company appears to be the better short-term credit risk due to its superior management of receivables and inventory, despite having slightly lower liquidity ratios.