The Following Are Summaries from the Income Statements and Balance

question 74

Essay

The following are summaries from the Income Statements and Balance Sheets of Red Shoe,Inc.and Blue Shoe,Inc.

$\begin{array}{c}\text { Red Shoe, Inc.}\\\text { Consolidated Statement of Income}\\\text { May 31,2011}\\\text { (in millions)}\\\begin{array}{|l|r|}\hline\text { Revenues } & \$ 10,697.0 \\\hline \text { Cost of sales } & 6,313.6 \\\hline \text { Gross profit } & 4,383.4 \\\hline \text { Operating expenses } & 3,137.6 \\\hline \text { Operating income } & 1,245.8 \\\hline \text { Interest expense } & 42.9 \\\hline \text { Other revenues and expenses } & \underline{79.9} \\\hline \text { Income before tax } & 1,123.0 \\\hline \text { Income taxes } & 382.9 \\\hline \text { Income before effect of accounting change } & 740.1 \\\hline \begin{array}{l}\text { Cumulative effect of accounting change, net } \\\text { of tax }\end{array} & \underline{266.1} \\\hline \text { Net income } & \$ 474.0\\\hline\end{array}\end{array}$

$\begin{array}{c}\text {Blue Shoe, Inc}\\\text {Consolidated Statement of Income}\\\text {January 3, 2011}\\\text {(in millions)}\\\begin{array}{|l|r|}\hline \text { Revenues } & \$ 133.5 \\\hline \text { Cost of sales } & 87.3 \\\hline \text { Gross profit } & 46.2 \\\hline \text { Operating expenses } & 37.3 \\\hline \text { Operating income } & 8.9 \\\hline \text { Interest expense } & (0.1) \\\hline \text { Other revenues and expenses } & \underline{0.3} \\\hline \text { Income before tax } & 9.1 \\\hline \text { Income taxes } & 3.9 \\\hline \text { Net income } & \$ 5.2\\\hline \end{array}\end{array}$
(1)For both companies compute the following ratios for 2011:
(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 2011:
(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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