The Following Are Summaries from the Income Statements and Balance

question 118

Essay

The following are summaries from the income statements and balance sheets of Red Shoe, Inc. and Blue Shoe, Inc.
RED SHOE, ПNC.
Consolidated Statement of Income
May 31, 2014
(in millions)
$\begin{array}{|l|r|}\hline \text { Revenues } & \$ 10,697.0 \\\hline \text { Cost of sales } & 6,313.6 \\\hline \text { Gross profit } & 4,383.4 \\\hline \text { Operating expenses } & 3,137.6 \\\hline \text { Operating income } & 1,245.8 \\\hline \text { Interest expense } & 42.9 \\\hline \text { Other revenues and expenses } & \underline{79.9} \\\hline \text { Income before tax } & 1,123.0 \\\hline \text { Income taxes } & 382.9 \\\hline \text { Income before effect of accounting change } & 740.1 \\\hline \begin{array}{l}\text { Cumulative effect of accounting change, net } \\\text { of tax }\end{array} & 266.1 \\\hline \text { Net income } & \$ 474.0 \\\hline\end{array}$ BLUE SHOE, INC
Consolidated Statement of Income
January 3, 2014
(in millions)
$\begin{array}{|l|r|}\hline \text { Revenues } & \$ 133.5 \\\hline \text { Cost of sales } & 87.3 \\\hline \text { Gross profit } & 46.2 \\\hline \text { Operating expenses } & 37.3 \\\hline \text { Operating income } & 8.9 \\\hline \text { Interest expense } & (0.1) \\\hline \text { Other revenues and expenses } & 0.3 \\\hline \text { Income before tax } & 9.1 \\\hline \text { Income taxes } & 3.9 \\\hline \text { Net income } & \$ 5.2\\\hline\end{array}$ (1) For both companies compute the following ratios for 2014:
(a) Current ratio
(b) Acid-test ratio
(c) Accounts receivable turnover
(d) Inventory turnover
(e) Days' sales in inventory
(f) Days' sales uncollected
Which company do you consider to be the better short-term credit risk? Explain.
(2) For both companies compute the following ratios for 2014:
(a) Profit margin ratio
(b) Return on total assets
(c) Return on common stockholders' equity
Which company do you consider to have better profitability ratios?

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