FS 2 working capital, current ratio, quick ratio

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Finance

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Apr 3, 2024

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Ratio analysis 2 (15 points) Name: Shawna Ye These are the three formulas you will use for the second financial statement analysis. You will use the NIKE financial statement located in appendix C. The information required for this ratio analysis is all found on the consolidated balance sheets. You will use the information from both years 5/31/18 and 5/31/17. Round the ratios to the nearest tenth Working capital: Current Assets – Current Liabilities 5/31/18 ratio: Current Assets: $15,134 Current Liabilities: $6,040 Working capital = $15,134 - $6,040 = $9,094 5/31/17 ratio: Current Assets: $16,061 Current Liabilities: $5,474 Working capital = $16,061 - $5,474 = $10,587 Current ratio = Current Assets / Current liabilities (Round to the nearest tenth) 5/31/18 ratio: Current Assets: $15,134 Current Liabilities: $6,040 Current ratio = $15,134 / $6,040 = 2.5 5/31/17 ratio:
Current Assets: $16,061 Current Liabilities: $5,474 Current ratio = $16,061 / $5,474 = 2.9 Quick Ratio = Quick assets / current liabilities (Round to the nearest tenth) Note: the quick assets only include those current assets easily converted to cash, so inventories and prepaid expenses will not be included. 5/31/18 ratio: Quick Assets: $15,134 (total current assets) - $5,261 (inventories) - $1,130 (prepaid expenses and other current assets) = $8,743 (Quick assets) Current Liabilities: $6,040 Quick Ratio = $8,743 / $6,040 = 1.4 5/31/17 ratio: Quick Assets: $16,061 (total current assets) - $5,055 (inventories) - $1,150 (prepaid expenses and other current assets) = $9,856 (Quick assets) Current Liabilities: $5,474 Quick Ratio = $9,856 / $5,474 = 1.8
These ratios measure a company’s ability to pay its current liabilities. Ideally the current ratio should be 2 or above and the quick ratio should be 1 or above. Calculate the three ratios and comment on Nikes ability to pay its current liabilities. Nike’s current ratio for both 2017 and 2018 is well above 2.0 at 2.9 and 2.5, respectively. This means that while Nike’s more than capable of paying back their debt in both 2017 and 2018, their ability to cover their liabilities decreased from 2017 to 2018. Similarly, the trend is the same for Nike’s quick ratio, where their ratios are well above the ideal (1.0) but decreases from 2017 to 2018. Lastly, not only has Nike’s abilities to pay off their current liabilities decreased over time, but their working capital has also decreased. This means that they have incurred more liabilities compared to their assets over the year.
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