Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 14 Financial Statement Analysis 667

Tommy Hilfiger Corp., the fashion apparel company, had the following current assets and cur-

rent liabilities at the end of two recent years:

a. Determine the (1) current ratio and (2) quick ratio for both years. Round to two decimal

places. Treat the deferred tax and other current assets as nonquick assets.

b. What conclusions can you draw from these data?

The bond indenture for the 10-year, 9^1 – 2 % debenture bonds dated January 2, 2007, required work-

ing capital of $350,000, a current ratio of 1.5, and a quick ratio of 1 at the end of each calendar

year until the bonds mature. At December 31, 2008, the three measures were computed as

follows:

1. Current assets:
   Cash $275,000
   Marketable securities 123,000
   Accounts and notes receivable (net) 172,000
   Inventories 295,000
   Prepaid expenses 35,000
   Goodwill 150,000
   Total current assets $1,050,000
   Current liabilities:
   Accounts and short-term notes payable $375,000
   Accrued liabilities 250,000
   Total current liabilities 625,000
   Working capital $ 425,000


2. Current ratio=1.68 ($1,050,000 ÷$625,000)


3. Quick ratio=1.52 ($570,000÷$375,000)

a. List the errors in the determination of the three measures of current position analysis.

b. Is the company satisfying the terms of the bond indenture?

The following data were taken from the financial statements of Durable Structures, Inc., for

December 31, 2007 and 2006:

December 31, December 31,

2007 2006

Accounts payable $ 150,000 $ 140,000

Current maturities of serial bonds payable 200,000 200,000

Serial bonds payable, 8%, issued 2002, due 2012 1,000,000 1,200,000

Common stock, $1 par value 100,000 100,000

Paid-in capital in excess of par 500,000 500,000

Retained earnings 1,900,000 1,600,000

Exercise 14-20

Leverage analysis: current
position

Goal 4

a. (1) March 31, 2004, current
ratio, 3.86

Exercise 14-21

Current position analysis

Goal 4

Exercise 14-22

Leverage analysis: long-term
debt position

Goal 4

a. Ratio of liabilities to
stockholders’ equity, Dec.
31, 2007, 0.54

March 31, 2004 March 31, 2003

(in millions) (in millions)

Cash and cash equivalents $414.5 $420.8

Temporary investments 27.5 —

Accounts receivable 188.5 185.0

Inventories 206.3 229.7

Deferred tax and other current assets 92.8 80

Short-term borrowings — 19.4

Current portion of long-term debt 0.7 151.9

Accounts payable 32.7 47.8

Accrued expenses and other current liabilities 207.2 185.9