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

(Cardigan), Huskisson Ltd. (Huskisson), and Mallet Inc. (Mallet) are small distribution companies. 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 Cardigan uses FIFO as its cost flow assumption, Huskisson uses average cost, and Mallet uses LIFO.

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 the 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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Balance Sheets As of December 31, 2004 Cardigan (FIFO) Huskisson (Average cost) Mallet (LIFO) Assets Cash $ 94,800 $ 94,800 $ 94,800 Accounts receivable Inventory Other current assets Total current assets Capital assets (net) Total assets 252,000 252,000 252,000 1,055,000 784,500 549,500 42,000 42,000 42,000 1,443,800 1,173,300 938,300 1,507,000 1,507,000 1,507,000 $2,950,800 $2,680,300 $2,445,300 Liabilities and Owners' Equity Bank loan Accounts payable $ 150,000 $ 150,000 $ 150,000 755,000 755,000 755,000 Other current liabilities 65,000 65,000 65,000 Total current liabilities 970,000 970,000 970,000 Long-term debt 262,000 262,000 262,000 Other non-current liabilities 50,000 50,000 50,000 Total liabilities 1,282,000 1,282,000 1,282,000 Capital stock 200,000 200,000 200,000 Retained earnings 1,468,800 1,198,300 963,300 Total liabilities and owners' equity $2,950,800 $2,680,300 $2,445,300