Ken Massey is trying to decide how to invest a recent windfall inheritance. Because he is something of a clotheshorse, his first thought was to look at two of his favorite stores, Abercrombie & Fitch and American Eagle Outfitters. Ken visited each company's website and calculated the following ratios based on the financial statements he found there. He also found some industry averages to use as a comparison.

Required
a. Which of the two companies has the stronger liquidity position?
b. How do the companies' positions compare to the industryaverages?

Transcribed Image Text:

Abercrombie & Fitch American Eagle 2011 Industry Average 2011 2010 2010 2011 2010 $783,422 2.1 $874,417 $882,087 $786,573 N/A Working capital Current ratio Acid-test ratio Accounts receivable N/A 2.8 0.6 3.0 2.0 2.6 3.2 2.6 0.5 turnover 50.7 times 41.9 times 82.0 times 83.0 times 103 times 104.3 times Average collection 7.2 days 3,4 times 8.7 days 4.4 days 3.6 times 6.0 times 4.4 days 3.5 days 5.7 times 5.5 times 3.5 days 4.2 times period Inventory turnover Average days to sell inventory 106.4 days 101.2 days 61.1 days 63.8 days 66.4 days 86.9 days