P4-46. Analysis and Interpretation of Liquidity and Solvency Refer to the financ

Question

P4-46. Analysis and Interpretation of Liquidity and Solvency Refer to the financial information of Costco Wholesale Corporation in P4-45 to answer the following c requirements Required a. Compute Costco's current ratio and quick ratio for 2016 and 2015. Comment on any observed trends. ment on any noticeable change. about Costco's ability to meet its debt obligations? b. Compute Costco's times interest earned and its liabilities-to-equity ratios for 2016 and 2015. Com- c. Summarize your findings about the company's liquidity and solvency. Do you have any concerns

Explanation / Answer

a) Costco's current and quick ratios :-

i) current ratio = current assets ÷ current liabilities

for 2015 = 17299 ÷ 16540 = 1.04

for 2016 = 15218 ÷ 15575 = 0.98

ii) Quick ratio = (current assets - inventory) ÷ current liabilities

for 2015 = (17299 - 8908) ÷ 16540 = 0.50

for 2016 = (15218 - 8969) ÷ 15575 = 0.40

Current ratio and quick ratio both deteriorated in year 2016 from 2015.

Company's liquidity ratios continuously declining and now its lower than the standard, company is still not capable completely to paid its current liabilities.

b.) i) Times interest earned = EBIT ÷ interest expense

for 2015 = 3624 ÷ 124 = 29.23

for 2016 = 3672 ÷ 133 = 27.61

ii) liability to equity ratio = Total liabilities ÷ total shareholders equity

for 2015 = 22823 ÷ 10616 = 2.15

for 2016 = 21084 ÷ 12079 = 1.75

company's times earned interest and debt to equity to ratio both deterioted in year 2016 as compared to year 2015. Company is not seems so solvent.

c.) Costco wholesale corporation seems in bad position as its all ratios decreases over the years, it is not able to cover its current liability with its available current assets which means it doesnt have sound liquidity.

Its solvency is also in question as it is above par but keeps on decreasing year by year. In future it can be very dangerous situation for them.

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