(The impact of cost flow assumptions on ratios, LO 1, 2, 7) Weybridge Corp.

(Weybridge), Kennetcook Ltd. (Kennetcook), and Aaskana Inc. (Aaskana) are small retail stores. They are identical in every respect—same amount of sales, same quantity of inventory sold, same number of employees. Everything is the same except that Weybridge uses FIFO as its cost flow assumption, Kennetcook uses average cost, and Aaskana uses LIFO.

You also learn that on December 31, 2004 the balances in Inventory for the three companies were:

Required:

a. Calculate the following ratios for each of the three companies:
i. current ratio ii. quick ratio iil. inventory turnover ratio iv. average number of days inventory on hand v. gross margin percentage vi. profit margin percentage . Which of the three companies has the strongest liquidity position?
. Which of the three companies is most profitable?
. Which of the three companies manages its inventory most effectively?
. The three companies’ bankers lend money based on the amount of accounts receivable 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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Income Statements For the Year Ended December 31, 2005 Weybridge Kennetcook Aaskana (FIFO) (Average cost) (LIFO) Revenue Cost of sales Gross margin $442,500 $442,500 $442,500 276,120 310,635 333,645 166,380 131,865 108,855 Other expenses 121,000 121,000 Net income (loss) $ 45,380 $ 10,865 121,000 ($ 12,145)