The Hershey Company is the largest producer of chocolate in North America under

Question

The Hershey Company is the largest producer of chocolate in North America under the Hershey's and Reese's brand names. The following balance sheet information is provided at the end of throe necent years (in thousands December 31, December 31 December 31 Year Year 2 Year 1 3 Cament assets: 374 854.00 $1,118,508.00 $728,27200 0.00 596940.00 477912D0 46L5810) 01,056.00 659,54100 633,262.00 77086.00231,37300 290568.00 224704700 $2,487,33400 $2,113,485.00 7,131.00 .00 Short-term investments Accounts receivable Inventories Other current assets Total oument assets 9Current labilities: 201700 $461,514.00 $441,97700 45560006508.001029,15300 564700 51,408,02200 1,47111000 Accounts payable Other current liabilities 12 Total liabilities Required Compute the working capitai for the tvee years b Compute the cument ratio for the three years. Rlound to one decimal place G. Compute the quick ratio for the three years. Rlound to one decimal place Interpret the shont-erm iquidity for the three years from ( Ane the other two measures in (a) and (bl consistent with your analysis in (d)?

Explanation / Answer

(a). Working capital;

Formula of working capital is as follow;

Working capital = Current assets – Current liabilities

For year 1;

Working capital ($2113485 – $1471110) = $642375

For year 2;

Working capital ($2487334 – $1408022) = $1079312

For year 3;

Working capital ($2247047 – $1935647) = $311400

(b). Current Ratio;

Formula of current ratio is as follow;

Current ratio = Current assets / Current liabilities

For year 1;

Current ratio ($2113485 / $1471110) = 1.4

For year 2;

Current ratio ($2487334 / $1408022) = 1.8

For year 3;

Current ratio ($2247047 / $1935647) = 1.2

(c). Quick Ratio;

Formula of Quick ratio is as follow;

Quick ratio = Quick assets / Current liabilities

For year 1;

Quick ratio ($1480223 / $1471110) = 1

For year 2;

Quick ratio ($1827793 / $1408022) = 1.3

For year 3;

Quick ratio ($1446011 / $1935647) = 0.7

Working Note;

Quick assets are calculated as follow;

For year 1;

Quick assets ($2113485 – $633262) = $1480223

For year 2;

Quick assets ($2487334 - $659541) = $1827793

For year 3;

Quick assets ($2247047 - $801036) = $1446011

(d).

On the basis of Quick ratio, it is clear that in year 1, company liquidity is satisfactory because quick ratio is 1 whereas in year 2, liquidity has been improved a lot because quick ratio is 1.3 but in year 3, company liquidity is unsatisfactory because quick ratio is below than 1 and it is 0.7. So overall we can say that in year 3, company liquidity position has been decreased.

(e).

Yes, other two measures (working capital and current ratio) both are consistent with analysis made in part (d) because working also improved in year 2 whereas in year 3 working capital has been declined sharply. In same manner current ratio also showed same trends hence both are consistent.

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