Financial Accounting: Tools for Business Decision Making, 8th Edition
Financial Accounting: Tools for Business Decision Making, 8th Edition
8th Edition
ISBN: 9781118953808
Author: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso
Publisher: WILEY
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Chapter 2, Problem 2.3EYCT

(a)

To determine

Working capital: This is the financial metric which evaluates the ability of a company to pay off the short-term debt obligations. It is the balance of current assets, after current liabilities are deducted.

Formula of working capital:

Working capital = Current assets – Current liabilities

Current ratio: The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company.

Formula of current ratio:

Current ratio = Current assetsCurrent liabilities

Debt to assets ratio: This financial ratio evaluates the ability of a company to pay off long-term debt obligations owed to creditors. This ratio assesses the solvency of a company.

Formula of debt to assets ratio:

Debt to assets ratio = Total liabilitiesTotal assets

Free cash flow: This measure evaluates the cash-generating capacity of a company from its operating activities, after paying capital expenditures and dividends.

Formula of free cash flow:

Free cash flow = {Net cash provided by operating activities–Capital expenditures–Dividends}

To compute: (1) Working capital, (2) Current ratio (3) Debt to assets ratio, (4) Free cash flow of Incorporation A and Incorporation W for 2014

(b)

To determine

To analyze: The liquidity and solvency position of two companies based on the computed ratios

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Financial Accounting: Tools for Business Decision Making, 8th Edition

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