25 Minutes, Easy
THE KROGER COMPANY, INC.
(Dollars in
Millions)
a. Current assets:
Cash 1,193$
Receivable
s
1,051
Merchandise inventorie
s
5,146
Other current assets 569
b.
(
1
)
Current ratio:
Current assets
(p
art a
)
7,959$
Current liabilities 11,057
Current ratio
(
$7,959 ÷ $11,057
)
0.72 to 1
(
2
)
Quick ratio:
(
)
(p
)
PROBLEM 14.4
A
Hill Education.
s
c.
d.
e.
PROBLEM 14.4
A
THE KROGER COMPANY, INC. (concluded)
No. It is difficult to draw conclusions from only the above ratios. Kroger’s current ratio is
below normal rules of thumb and its quick ratio is quite low. Kroger’s liquidity is highly
Due to characteristics of the industry, supermarkets tend to have smaller amounts of current
assets and quick assets than other types of merchandising companies. An inventory of food has
they have relatively few receivables. Although supermarkets may generate large amounts of
cash, it is not profitable for them to hold assets in this form. Therefore, they are likely to
In evaluating Kroger’s liquidity, it would be useful to review the company’s financial position
in prior years, statements of cash flows, and the financial ratios of other supermarket chains.
Hill Education.
35 Minutes, Medium
(Dollars in
Thousands)
a. (1) Quick assets:
Cash 50,230$
Marketable securities (short-term) 55,926
Accounts receivable 23,553
Total quick assets 129,709
$
(2) Current assets:
Cash 50,230$
Marketable securities (short-term) 55,926
Accounts receivable 23,553
(3) Current liabilities:
Notes payable to banks (due within one year) 20,000$
Accounts payable 5,912
Dividends payable 1,560
$
b. (1) Quick ratio:
Quick assets (part a) 129,709$
Current liabilities 55,442
Quick ratio: ($129,709 ÷ $55,442) 2.3 to 1
(2) Current ratio:
Current assets (part a) 167,65
5
$
$
6
$
PROBLEM 14.5
A
SWEET TOOTH, INC.
5
$
c. (1)
(2)
PROBLEM 14.5
A
SWEET TOOTH, INC. (concluded)
From the viewpoint of short-term creditors, Sweet Tooth appears highly liquid. Its quick
and current ratios are well above normal rules of thumb, and the company’s cash and
marketable securities alone are almost twice its current liabilities.
Long-term creditors should feel relatively secure. Not only is the company highly liquid,
Hill Education.
45 Minutes, Strong
b. (1) Current ratio:
Current assets:
Cash 30,000$
Accounts receivable 150,000
Inventory 200,000
Total current assets 380,000
$
Current liabilities 150,000$
Current ratio ($380,000 ÷ $150,000) 2.5 to 1
(2) Quick ratio:
Quick assets:
Cash 30,000$
(3) Working capital:
Current assets [part b (1)] 380,000$
$
(4) Debt ratio:
Total liabilities
Total assets 1,000,000$
Less: Total stockholders’ equity 300,000
PROBLEM 14.6
A
DICKSON, INC
Parts a, c, e, and f appear on the following page.
a.
c.
f. (1)
PROBLEM 14.6
A
DICKSON, INC. (concluded)
Long-term creditors do not appear to have a high margin of safety. The debt ratio of 70%
is high for American industry. Also, debt is continuing to rise. During the current year,
company is not able to borrow the money to fund its dividend payments, these payments
must be reduced.
In the statement of cash flows, amounts are reported on a cash basis, whereas in the income
statement, they are reported under the accrual basis. Apparently, $5,000 of the interest
expense incurred during the year had not been paid as of year-end. This amount should be
included among the accrued expenses appearing as a current liability in the company’s
balance sheet.
By traditional measures, the company’s current ratio (2.5 to 1) and quick ratio (1.2 to 1)
appear quite adequate. The company also generates a positive cash flow from operating
Interest expense of $84,000 on $550,000 of interest-bearing debt indicates an interest rate of
approximately 15.27%. Obviously, it is not profitable to borrow money at 15.27%, and then
reinvest these borrowed funds to earn a pretax return of only 10.5%. If Dickson cannot earn a
return on assets that is higher than the cost of borrowing, it should not borrow money.
Hill Education.
25 Minutes, Medium
($
i
n
Milli
ons
)
a. Current ratio:
(
1
)
Be
g
innin
g
of
y
ear
(
$9,150 ÷ $4,726
)
1.94 to 1
(
2
)
End of
y
ear
(
$9,515 ÷ 5,857
)
1.62 to 1
b. Workin
g
ca
p
ital:
(
)
g
g
y
(
(
)
y
(
(
)
PROBLEM 14.7
A
MEDTRONICS
25 Minutes, Medium
a. (1) Inventory turnover:
= 4.75 times
(2) Accounts receivable turnover:
Cost of Goods Sold, $1,781,000
Average Inventory, $375,000
PROBLEM 14.8
A
HARRISON ELECTRONICS, INC.
b.
PROBLEM 14.8
A
HARRISON ELECTRONICS, INC. (concluded)
Obtaining the loan will be desirable to stockholders because the return on average assets
(16%) is greater than the prospective rate of payment to creditors (10%). In other words, the
stockholders will gain from applying leverage, which is a form of financing using fixed-return
securities as capital.
The assumption of long-term debt would increase the risk to the stockholders. In the event of
Hill Education.
35 Minutes, Medium
a.
A
nothe
r
Imports
World Inc.
(
1
)
Workin
g
ca
p
ital:
(
$53,000 + $75,000 + $84,000 – $105,000
)
107,000
$
(
$22,000 + $70,000 + $160,000 – $100,000
)
152,000
$
(
2
)
Current ratio:
(
$53,000 + $75,000 + $84,000
)
÷ $105,00
0
2 to 1
(
$22,000 + $70,000 + $160,000
)
÷ $100,000 2.5 to 1
(
3
)
Quick ratio:
(
$53,000 + $75,000
)
÷ $105,00
0
1.2 to 1
(
)
(
)
(
(
(
(
(
)
(
(
(
(
)
(
PROBLEM 14.9
A
A
NOTHER WORLD AND
IMP
O
RT
S
, IN
C
.