Chapter 17 Analysis of Financial Statements 755 Fargo Company Company Ball Fargo

Question

Chapter 17 Analysis of Financial Statements 755 Fargo Company Company Ball Fargo CompanyCompany Ball Data from the current year-end balance sheets Data from the current year's income statement Sales Assets Cash Accounts recelvable, net Current notes receivable (trade) Merchandise inventory Prepaid expenses Plant assets, net Total assets $393,600 $667,500 290,600 480,000 12,300 12,300 33,850 61,700 2.19 s 20,000 36,500 Cost of goods sold.. 5,900 77.100 11.600 86,800 9,700 70,500 Interest expense 9,000 Income tax expense 82,000 Net income 0,100 Basic earnings per share 5,700 1.27 176,900 252,300 $382,100 $460,400 Beginning-of-year balance sheet data Accounts receivable, net Liabilities and Equity Current riabilities Long-term notes payable Common stock, $5 par value Retained earnings Total liabilities and equity $72,200 73,300 S 90,500 97,000 Current notes receivable (trade) 105,100 383,400 133,000 49,100 80,500 443,000 141,000 109,700 93,000 93,300 Merchandise inventory 133,000 141,000 Total assets 65,600 129,100 Common stock, $5 par value S382,100 $460,400 Retained earnings Required 1. For both companies compute the (a) current ratio, (b) acid-test ratio, (c) accounts (including notes) Check Fa Acc receivable turnover, (d) inventory turnover, (e) days' sales in inventory, and (f) days sales uncol- lected. Identify the company you consider to be the better short-term credit risk and explain why. inventory turnover, 30 Round to one decimal place 4 9 2. For both companies compute the (a) profit margin ratio, (b) total asset turnover, (c) return on total as- Bal: Profit margin 92%P-14 sels, and (d) return on comnon stockholders' equity.Assuming al echcoman pad rash dindends of $1.50 per share and each company's stock can be purchased at $25 per share, compute their (e) price- earnings ratios and (f) dividend yields. Round to one decimal place; for part b, round to two decimals. Identify which company's stock you would recommend as the better investment and explain why

Explanation / Answer

1.

Even though the current ratio for Fargo is better than for Ball, the better ratio is on account of inventory, as can be seen from the acid-test ratio which is equal to both the companies.

With regard too management of working capital, Balll company is better placed than Fargo company, as it is able to convert its working capital into sales faster, as can be seen from the turnover ratios and days outstanding.

Hence from the point of management of short-term risk, Ball company is better than Fargo company.

Working:

2.

Fargo Company Ball Company 1 Current Ratio 2.3 2.1 2 Acid-test ratio 1.3 1.3 3 Accounts Receivable Turnover 4.9 8.7 4 Inventory turnover 3.0 5.9 5 Days sales in inventory 120.5 61.8 6 Days sales uncollected 74.6 41.8

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