LA furniture company has requested that you determine whether the company\'s abi
ID: 2470361 • Letter: L
Question
LA furniture company has requested that you determine whether the company's ability to pay its current liabilties and long-term debts improved or deteriorated during 2014. To answer this question, compute the following ratios for 2014 and 2013. a. Working capital b. Current ratio c. Quick (acid-test) ratio d. Debt ratio e. Times-interest-earned ratio. Round your answers to two decimal places. Summarize the results of your analysis in a short paragraph.
Cash 2014-1000 2013-47000
Short-term investments 2014-28000 2013-27000
Net recievables 2014-114000 2013-126000
Inventory 2014-236000 2013-265000
Prepaid expenses 2014-22000 2013-8000
total assets 2014-18000 2013-35000
total current liabilites 2014-224000 2013-262000
long-term debt 2014-97000 2013-174000
Income from operations 2014-261000 2013-150000
interest expense 2014-41000 2013-42000
Explanation / Answer
LA FURNITURE COMPANY The ratios are computed as below for the years: 2014 2013 a) Working Capital (current assets-current liabilities) 177000 211000 b) Current Ratio (current assets/current liabilities) 1.79 1.81 c) Quick ratio (current assets-inventory-prepaid 0.64 0.76 expenses/current liabilities) d) Debt ratio--for this ratio the figure of equity is required. This can be derived from the total assets figure. But the figures given of 18000 and 35000 are on the face of it not correct. e) Times interest earned ratio 6.37 3.57 (income operations/interest expense) Calclations are given below: 2014 2013 cash 1000 47000 short term investments 28000 27000 net receivables 114000 126000 inventory 236000 265000 prepaid exp 22000 8000 total current assets 401000 473000 less: total current liabilities 224000 262000 working capital 177000 211000 long term debt 97000 174000 income from operations 261000 150000 interest expense 41000 42000 Total outside liabilities 321000 436000 Comments on the situation based on the ratios obtained Ability to pay current liabilities: The current ratio is only marginally reduced during the year 2014. The ratio should be ideally 2 or above. The Quick ratio is below 1 for both the years, which indicates difficulty in paying the current liabilities in time. The situation has worsened during 2014 as the ratio has decreased to 0.64 from 0.76. This should be paid immediate attention. Ability to pay long term debts On ability to pay interest on debt The interest coverage ratio (times-interest-earned-ratio) has jumped from 3.57 to 6.37 during 2014, which is a good sign. It indicates that the firm has earned so many times the interest payable. The situation has improved very much during the year. There is no cause for concern now. On ability to repay long term debt or instalments of principal for this Debt/equity ratio has to be worked out. There is no way, as pointed out above to find the equity portion. The instalments due are also not available. The ideal ratio would be the Debt service coverage ratio for which details are not available.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.