Weybridge Corp. (Weybridge)

and Kennetcook Ltd. (Kennetcook) are small retail stores. They are identical in every respect—amount of sales, quantity of inventory sold, number of employees.

Everything is the same except that Weybridge uses FIFO as its cost formula and Kennetcook uses avers cost.

You also learn that on December 31, 2013, the balances in inventory for the two companies:

Required

a. Calculate the following ratios for each of the two companies:
i. current ratio il. quick ratio li. 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 most profitable?

d. Which company manages its inventory most effectively?

e. The two 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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Revenue Cost of sales Gross margin Income Statements For the Year Ended December 31, 2014 Weybridge Kennetcook (FIFO) (Average cost) $831,000 $831,000 586,951 634,288 244,049 196,712 Other expenses 169,400 169,400 Net income (loss) $ 74,649 $ 27,312 Assets Cash $ 14,220 $ 14,220 Accounts receivable 44,100 44,100 Inventory 184,625 137,288 Other current assets 7,350 7,350 Total current assets 250,295 202,958 Property, plant, and equipment (net) 263,725 263,725 Total assets $514,020 $466,683 Liabilities and Owners' equity Bank loan Accounts payable $ 22,500 $ 22,500 132,125 132,125 Other current liabilities 11,375 11,375 Total current liabilities 166,000 166,000 Long-term debt 45,850 45,850 Other non-current liabilities 8,750 8,750 Total liabilities 220,600 220,600 Capital stock 35,000 35,000 Retained earnings 258,420 211,083 Total liabilities and owners' equity $514,020 $466,683