Cardigan Corp. (Cardigan) and Huskisson Ltd. (Huskisson) are small distribution companies. They are identical in every respect—amount of sales, quantity of inventory sold, number of employees.

Everything is the same except that Cardigan uses FIFO as its cost formula and Huskisson uses average cost.

Required:

a. Calculate the following ratios for each of the two companies: i. current ratio ii. quick ratio iii. inventory turnover ratio iv. average number of days inventory on hand v. gross margin percentage vi. profit margin percentage

b. Which company has the strongest liquidity position?

c. Which company is the most profitable?

d. Which company manages its inventory most effectively?

e. The two companies' bankers lend money based on the amount of accounts receiv- able and inventory on hand. Which company will be able to obtain the largest loan? From the banks' point of view, is the company that receives the largest loan the best credit risk? Explain.

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Balance Sheets as of December 31, 2015 Cardigan (FIFO) Huskisson (Average cost) Assets Cash $ 45,250 $ 45,250 Accounts receivable 389,000 389,000 Inventory 1,107,750 823,725 Other current assets 35,200 35,200 Total current assets 1,577,200 1,293,175 Property, plant, and equipment (net) 2,150,000 2,150,000 Total assets $3,727,200 $3,443,175 Liabilities and Owners' equity Bank loan Accounts payable Other current liabilities $ 210,500 $ 210,500 855,000 855,000 68,250 68,250 Total current liabilities 1,133,750 1,133,750 Long-term debt 545,000 545,000 Other non-current liabilities 52,500 52,500 Total liabilities 1,731,250 1,731,250 Capital stock 420,000 420,000 Retained earnings 1,575,950 1,291,925 Total liabilities and owners' equity $3,727,200 $3,443,175