Question

Summary information from the financial statements of two companies competing in the same industry follows.

Fargo Ball Fargo Ball

Company CompanyCompanyCompany

Data from the current year-end balance sheets Data from the current year’s income statement Assets Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(393,600 \)667,500

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \( 20,000 \) 36,500 Cost of goods sold . . . . . . . . . . . . . . . . . . 290,600 480,000

Accounts receivable, net . . . . . . . . . . . . . 77,100 70,500 Interest expense . . . . . . . . . . . . . . . . . . . . 5,900 12,300

Current notes receivable (trade) . . . . . . . 11,600 9,000 Income tax expense . . . . . . . . . . . . . . . . . 5,700 12,300

Merchandise inventory . . . . . . . . . . . . . . . 86,800 82,000 Net income . . . . . . . . . . . . . . . . . . . . . . . . 33,850 61,700

Prepaid expenses . . . . . . . . . . . . . . . . . . . 9,700 10,100 Basic earnings per share . . . . . . . . . . . . . 1.27 2.19

Plant assets, net . . . . . . . . . . . . . . . . . . . . 176,900 252,300

Total assets . . . . . . . . . . . . . . . . . . . . . . . . \(382,100 \)460,400 Beginning-of-year balance sheet data Liabilities and Equity Accounts receivable, net . . . . . . . . . . . . . \( 72,200 \) 73,300

Current liabilities . . . . . . . . . . . . . . . . . . . . \( 90,500 \) 97,000 Current notes receivable (trade) . . . . . . . 0 0

Long-term notes payable . . . . . . . . . . . . . 93,000 93,300 Merchandise inventory . . . . . . . . . . . . . . . 105,100 80,500

Common stock, \(5 par value . . . . . . . . . . 133,000 141,000 Total assets . . . . . . . . . . . . . . . . . . . . . . . . 383,400 443,000 Retained earnings . . . . . . . . . . . . . . . . . . 65,600 129,100 Common stock, \)5 par value.......... 133,000 141,000

Total liabilities and equity . . . . . . . . . . . . . \(382,100 \)460,400 Retained earnings . . . . . . . . . . . . . . . . . . . 49,100 109,700

Required

1. For both companies compute the

(a) current ratio,

(b) acid-test ratio,

(c) accounts (including notes) receivable turnover,

(d) inventory turnover,

(e) days’ sales in inventory, and

(f) days’ sales uncollected.

Identify the company you consider to be the better short-term credit risk and explain why. Round to one decimal place.

Short answer

Ratio	Fargo	Ball
Current Ratio	2.3	2.1
Acid-test Ratio	1.2	1.2
Accounts receivable turnover	4.9 times	8.7 times
Inventory turnover	3 times	5.9 times
Days sales in inventory	109 days	62.3 days
Days’ sales uncollected	82.2 days	43.5 days

The Fargo Company is better for short-term credit risk as it has better ratios.

Step-by-step solution

Step 1:Definition of Assets

Resources owned by the business entity or a country expecting some revenue or benefit in the future are known as assets. In accounting, assets can be of two types: current and non-current.

Step 2:Computation of current ratio

Fargo

$$\begin{gathered} \mathbf{Current}\mathbf{}\mathbf{ratio}\mathbf{=}\frac{\mathbf{Current}\mathbf{}\mathbf{Assets}}{\mathbf{Current}\mathbf{}\mathbf{Liabilities}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{205}\mathbf{,}\mathbf{200}}{\mathbf{\$}\mathbf{90}\mathbf{,}\mathbf{500}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{2}\mathbf{.}\mathbf{3} \end{gathered}$$

Working note

role="math" localid="1663191707256" $$\begin{gathered} \mathbf{Current}\mathbf{}\mathbf{Assets}\mathbf{=}\mathbf{Cash}\mathbf{+}\mathbf{Accounts}\mathbf{}\mathbf{Receivables}\mathbf{}\mathbf{Net}\mathbf{+}\mathit{C}\mathit{u}\mathit{r}\mathit{r}\mathit{e}\mathit{n}\mathit{t}\mathbf{}\mathit{N}\mathit{o}\mathit{t}\mathit{e}\mathit{s}\mathbf{}\mathit{R}\mathit{e}\mathit{c}\mathit{e}\mathit{i}\mathit{v}\mathit{a}\mathit{b}\mathit{l}\mathit{e}\mathit{s}\mathbf{\left(}\mathit{t}\mathit{r}\mathit{a}\mathit{d}\mathit{e}\mathbf{\right)}\mathbf{+} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{Merchandise}\mathbf{}\mathbf{Inventory}\mathbf{+}\mathbf{Prepaid}\mathbf{}\mathbf{Expenses} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{77}\mathbf{,}\mathbf{100}\mathbf{+}\mathbf{\$}\mathbf{11}\mathbf{,}\mathbf{600}\mathbf{+}\mathbf{\$}\mathbf{86}\mathbf{,}\mathbf{800}\mathbf{+}\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{700} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{205}\mathbf{,}\mathbf{200} \end{gathered}$$

Ball

$$\begin{gathered} \mathbf{Current}\mathbf{}\mathbf{ratio}\mathbf{=}\frac{\mathbf{Current}\mathbf{}\mathbf{Assets}}{\mathbf{Current}\mathbf{}\mathbf{Liabilities}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{208}\mathbf{,}\mathbf{100}}{\mathbf{\$}\mathbf{97}\mathbf{,}\mathbf{000}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{2}\mathbf{.}\mathbf{1} \end{gathered}$$

Working note

role="math" localid="1663191970946" $$\begin{gathered} \mathbf{Current}\mathbf{}\mathbf{Assets}\mathbf{=}\mathbf{Cash}\mathbf{+}\mathbf{Accounts}\mathbf{}\mathbf{Receivables}\mathbf{}\mathbf{Net}\mathbf{+}\mathit{C}\mathit{u}\mathit{r}\mathit{r}\mathit{e}\mathit{n}\mathit{t}\mathbf{}\mathit{N}\mathit{o}\mathit{t}\mathit{e}\mathit{s}\mathbf{}\mathit{R}\mathit{e}\mathit{c}\mathit{e}\mathit{i}\mathit{v}\mathit{a}\mathit{b}\mathit{l}\mathit{e}\mathit{s}\mathbf{\left(}\mathit{t}\mathit{r}\mathit{a}\mathit{d}\mathit{e}\mathbf{\right)}\mathbf{+} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{Merchandise}\mathbf{}\mathbf{Inventory}\mathbf{+}\mathbf{Prepaid}\mathbf{}\mathbf{Expenses} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{36}\mathbf{,}\mathbf{500}\mathbf{+}\mathbf{\$}\mathbf{70}\mathbf{,}\mathbf{500}\mathbf{+}\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{82}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{100} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{208}\mathbf{,}\mathbf{100} \end{gathered}$$

Step 3:Computation of acid-test ratio

Fargo

$$\begin{gathered} \mathbf{Acid}\mathbf{}\mathbf{test}\mathbf{}\mathbf{Ratio}\mathbf{=}\frac{\mathbf{Quick}\mathbf{}\mathbf{Assets}}{\mathbf{Current}\mathbf{}\mathbf{Liabilities}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{108}\mathbf{,}\mathbf{700}}{\mathbf{\$}\mathbf{90}\mathbf{,}\mathbf{500}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{1}\mathbf{.}\mathbf{2} \end{gathered}$$

Working note

$$\begin{gathered} \mathbf{Quick}\mathbf{}\mathbf{Assets}\mathbf{=}\mathbf{Current}\mathbf{}\mathbf{Assets}\mathbf{-}\mathbf{Inventory}\mathbf{-}\mathbf{Prepaid}\mathbf{}\mathbf{Expenses} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{205}\mathbf{,}\mathbf{200}\mathbf{-}\mathbf{\$}\mathbf{86}\mathbf{,}\mathbf{800}\mathbf{-}\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{700} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{108}\mathbf{,}\mathbf{700} \end{gathered}$$

Ball

$$\begin{gathered} \mathbf{Acid}\mathbf{}\mathbf{test}\mathbf{}\mathbf{Ratio}\mathbf{=}\frac{\mathbf{Quick}\mathbf{}\mathbf{Assets}}{\mathbf{Current}\mathbf{}\mathbf{Liabilities}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{116}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{97}\mathbf{,}\mathbf{000}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{1}\mathbf{.}\mathbf{2} \end{gathered}$$

Working note

$$\begin{gathered} \mathbf{Quick}\mathbf{}\mathbf{Assets}\mathbf{=}\mathbf{Current}\mathbf{}\mathbf{Assets}\mathbf{-}\mathbf{Inventory}\mathbf{-}\mathbf{Prepaid}\mathbf{}\mathbf{Expenses} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{208}\mathbf{,}\mathbf{100}\mathbf{-}\mathbf{\$}\mathbf{82}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{100} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{116}\mathbf{,}\mathbf{000} \end{gathered}$$

Step 4:Computation of accounts receivables turnover

Fargo

$$\begin{gathered} \mathbf{Accoounts}\mathbf{}\mathbf{receivables}\mathbf{}\mathbf{turnover}\mathbf{=}\frac{\mathbf{Net}\mathbf{}\mathbf{Sales}}{\mathbf{Average}\mathbf{}\mathbf{Accounts}\mathbf{}\mathbf{Receivables}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{393}\mathbf{,}\mathbf{600}}{\frac{\mathbf{\$}\mathbf{77}\mathbf{,}\mathbf{100}\mathbf{+}\mathbf{\$}\mathbf{72}\mathbf{,}\mathbf{200}\mathbf{+}\mathbf{\$}\mathbf{11}\mathbf{,}\mathbf{600}}{\mathbf{2}}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{4}\mathbf{.}\mathbf{9}\mathbf{}\mathbf{times} \end{gathered}$$

Ball

$$\begin{gathered} \mathbf{Accoounts}\mathbf{}\mathbf{receivables}\mathbf{}\mathbf{turnover}\mathbf{=}\frac{\mathbf{Net}\mathbf{}\mathbf{Sales}}{\mathbf{Average}\mathbf{}\mathbf{Accounts}\mathbf{}\mathbf{Receivables}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{667}\mathbf{,}\mathbf{500}}{\frac{\mathbf{\$}\mathbf{70}\mathbf{,}\mathbf{500}\mathbf{+}\mathbf{\$}\mathbf{73}\mathbf{,}\mathbf{300}\mathbf{+}\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{000}}{\mathbf{2}}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{8}\mathbf{.}\mathbf{7}\mathbf{}\mathbf{times} \end{gathered}$$

Computation of Inventory turnover

Fargo

$$\begin{gathered} \mathbf{Inventory}\mathbf{}\mathbf{Turnover}\mathbf{=}\frac{\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{goods}\mathbf{}\mathbf{sold}}{\mathbf{Average}\mathbf{}\mathbf{Inventory}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{290}\mathbf{,}\mathbf{600}}{\frac{\mathbf{\$}\mathbf{86}\mathbf{,}\mathbf{800}\mathbf{+}\mathbf{\$}\mathbf{105}\mathbf{,}\mathbf{100}}{\mathbf{2}}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{3}\mathbf{}\mathbf{times} \end{gathered}$$

Ball

$$\begin{gathered} \mathbf{Inventory}\mathbf{}\mathbf{Turnover}\mathbf{=}\frac{\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{goods}\mathbf{}\mathbf{sold}}{\mathbf{Average}\mathbf{}\mathbf{Inventory}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{480}\mathbf{,}\mathbf{000}}{\frac{\mathbf{\$}\mathbf{82}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{80}\mathbf{,}\mathbf{500}}{\mathbf{2}}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{5}\mathbf{.}\mathbf{9}\mathbf{}\mathbf{times} \end{gathered}$$

Computation of days’ sales in inventory

Fargo

$$\begin{gathered} \mathbf{Days}\mathbf{}\mathbf{sales}\mathbf{}\mathbf{in}\mathbf{}\mathbf{Inventory}\mathbf{=}\frac{\mathbf{Ending}\mathbf{ }\mathbf{Merchandise}\mathbf{}\mathbf{Inventory}}{\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{goods}\mathbf{}\mathbf{sold}}\mathbf{\times }\mathbf{365} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{86}\mathbf{,}\mathbf{800}}{\mathbf{\$}\mathbf{290}\mathbf{,}\mathbf{600}}\mathbf{\times }\mathbf{365} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{109}\mathbf{}\mathbf{days} \end{gathered}$$

Ball

$$\begin{gathered} \mathbf{Days}\mathbf{}\mathbf{sales}\mathbf{}\mathbf{in}\mathbf{}\mathbf{Inventory}\mathbf{=}\frac{\mathbf{Ending}\mathbf{ }\mathbf{Merchandise}\mathbf{}\mathbf{Inventory}}{\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{goods}\mathbf{}\mathbf{sold}}\mathbf{\times }\mathbf{365} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{82}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{480}\mathbf{,}\mathbf{000}}\mathbf{\times }\mathbf{365} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{62}\mathbf{.}\mathbf{3}\mathbf{}\mathit{d}\mathit{a}\mathit{y}\mathit{s} \end{gathered}$$

Computation of days’ sales uncollected

Fargo

$$\begin{gathered} \mathbf{Days}\mathbf{}\mathbf{sales}\mathbf{}\mathbf{uncollected}\mathbf{=}\frac{\mathbf{Accounts}\mathbf{}\mathbf{receivables}\mathbf{\left(}\mathbf{net}\mathbf{\right)}\mathbf{+}\mathbf{Notes}\mathbf{}\mathbf{Receivables}\mathbf{\left(}\mathbf{trade}\mathbf{\right)}}{\mathbf{Sales}}\mathbf{\times }\mathbf{365} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{77}\mathbf{,}\mathbf{100}\mathbf{+}\mathbf{11}\mathbf{,}\mathbf{600}}{\mathbf{393}\mathbf{,}\mathbf{600}}\mathbf{\times }\mathbf{365} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{82}\mathbf{.}\mathbf{2}\mathbf{}\mathbf{days} \end{gathered}$$

Ball

$$\begin{gathered} \mathbf{Days}\mathbf{}\mathbf{sales}\mathbf{}\mathbf{uncollected}\mathbf{=}\frac{\mathbf{Accounts}\mathbf{}\mathbf{receivables}\mathbf{\left(}\mathbf{net}\mathbf{\right)}\mathbf{+}\mathbf{Notes}\mathbf{}\mathbf{Receivables}\mathbf{\left(}\mathbf{trade}\mathbf{\right)}}{\mathbf{Sales}}\mathbf{\times }\mathbf{365} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{70}\mathbf{,}\mathbf{500}\mathbf{+}\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{667}\mathbf{,}\mathbf{500}}\mathbf{\times }\mathbf{365} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{43}\mathbf{.}\mathbf{5}\mathbf{}\mathit{d}\mathit{a}\mathit{y}\mathit{s} \end{gathered}$$

Explanation

Fargo Company is better than the Ball Company in terms of short-term credit risk because it has better liquidity and efficiency ratios than the Ball Company.