Question

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.



You also learn that on December 31, 2017, the balances in inventory for the two companies were



Required:
a. Calculate the following ratios for each of the 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 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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  • CreatedFebruary 26, 2015
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