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(a)
Formula of working capital:
To compute: (a) Working capital.
(a)
Explanation of Solution
Compute working capital of Corporation T, if current assets are $17,488,000,000 and current liabilities are $10,512,000,000.
Compute working capital of Corporation W, if current assets are $48,949,000,000 and current liabilities are $55,390,000,000.
(b)
Formula of current ratio:
To compute: (b) Current ratio.
(b)
Explanation of Solution
Compute current ratio of Corporation T, if current assets are $17,488,000,000 and current liabilities are $10,512,000,000.
Compute current ratio of Corporation W, if current assets are $48,949,000,000 and current liabilities are $55,390,000,000.
(c)
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:
To compute: (c) Debt to assets ratio.
(c)
Explanation of Solution
Compute debt to assets ratio of Corporation T, if total assets are $44,106,000,000, current liabilities are $10,512,000,000, and long-term liabilities are $19,882,000,000.
Compute debt to assets ratio of Corporation W, if total assets are $163,429,000,000, current liabilities are $55,390,000,000, and long-term liabilities are $42,754,000,000.
(d)
Formula of free cash flow:
To compute: (d) Free cash flow.
(d)
Explanation of Solution
Compute free
Compute free cash flow of Corporation W, if net cash provided by operating activities is $23,147,000,000, capital expenditures are $11,499,000,000, and dividends paid are $3,746,000,000.
(e)
Earnings per share (EPS): The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).
Formula of EPS:
To compute: (e) EPS of Corporation T and Corporation W for 2017.
(e)
Explanation of Solution
Compute EPS of Corporation T, if net income is $2,214,000,000, preferred dividends are $0, and weighted common shares outstanding are 774,000,000 shares.
Compute EPS of Corporation W, if net income is $13,400,000,000, preferred dividends are $0, and weighted common shares outstanding are 3,951,000,000 shares.
(f)
Working capital: The measure which evaluates the ability of a company to pay off the short-term debt obligations, by computing the excess of current assets over current liabilities is referred to as working capital.
Formula of working capital:
To analyze: (f) the liquidity and solvency position of two companies based on the computed ratios
Explanation of Solution
Analysis:
- Working capital of Corporation T is $6,976,000 and current ratio is 1.66:1. Working capital of Corporation W is $(6,441,000,000) and current ratio is 0.88:1. Based on these ratios, it can be inferred that the Corporation T is more liquid than Corporation W.
- Debt to assets ratio of Corporation T is 68.9% and free cash flow is $418,000,000. Debt to assets ratio of Corporation W is 60.1% and free cash flow is $7,902,000,000. Based on these two ratios, it can be inferred that the Corporation W is more solvent than Corporation T
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Chapter 2 Solutions
Financial Accounting 8th Edition
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Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning