Analysis and Interpretation of Liquidity and Solvency

Balance sheets and income statements for Costco Wholesale Corporation follow.

Costco Wholesale Corporation

Consolidated Statements of Earnings

For Fiscal Years Ended $($$ millions$)$ September $2,2018$

Total revenue $$141,576$

Operating expenses

Merchandise costs $123,152$

Selling, general and administrative $13,876$

Preopening expenses $68$

Operating Income $4,480$

Other income $($expense$)$

Interest expense $159$

Interest income and other, net $(121)$

Income before income taxes $4,442$

Provision for income taxes $1,263$

Net income including noncontrolling interests $3,179$

Net income attributable to noncontrolling interests $(45)$

Net income attributable to Costco $$3,134$

Costco Wholesale Corporation

Consolidated Balance Sheets

$($$ millions, except par value and share data$)$ September $2,2018$ September $3,2017$

Current assets

Cash and cash equivalents $$6,055$ $$4,546$

Short$-$term investments $1,2041,233$

Receivables, net $1,6691,432$

Merchandise inventories $11,0409,834$

Other current assets $321272$

Total current assets $20,28917,317$

Net property and equipment $19,68118,161$

Other assets $860869$

Total assets $$40,830$ $$36,347$

Current liabilities

Accounts payable $$11,237$ $$9,608$

Accrued salaries and benefits $2,9942,703$

Accrued member rewards $1,057961$

Deferred membership fees $1,6241,498$

Other current liabilities $3,0142,725$

Total current liabilities $19,92617,495$

Long$-$term debt $6,4876,573$

Other liabilities $1,3141,200$

Total liabilities $27,72725,268$

Equity

Preferred stock, $$0\mathrm{.}01$ par value: $00$

Common stock, $$0\mathrm{.}01$ par value: $44$

Additional paid$-$in$-$capital $6,1075,800$

Accumulated other comprehensive loss $(1,199)(1,014)$

Retained earnings $7,8875,988$

Total Costco stockholders$$ equity $12,79910,778$

Noncontrolling interests $304301$

Total equity $13,10311,079$

Total liabilities and equity $$40,830$ $$36,347$

$($a$)$ Compute Costco$$s current ratio and quick ratio for $2018$ and $2017.($Round answers two decimal places.$)$

$2018$ current ratio $=$ Answer

$22$

$2017$ current ratio $=$ Answer

$26\mathrm{.}51$

$2018$ quick ratio $=$ Answer

$0$

$2017$ quick ratio $=$ Answer

$0$

$($b$)$ Compute Costco$$s times interest earned and its liabilities$-$to$-$equity ratios for $2018$ and $2017.$ In $2017,$ Costco reported earnings before interest and tax $($EBIT$)$ of $$4,111$ million and interest expense of $$134$ million. $($Round answers two decimal places.$)$

$2018$ times interest earned $=$ Answer

$0$

$2017$ times interest earned $=$ Answer

$0$

$2018$ liabilities$-$to$-$equity $=$ Answer

$0$

$2017$ liabilities$-$to$-$equity $=$ Answer

$0$

$($c$)$ Summarize your findings about the company$$s liquidity and solvency. Do you have any concerns about Costco$$s ability to meet its debt obligations?

Costco's liabilities$-$to$-$equity ratio decreased thus its solvency has declined.

Costco's times interest earned is high thus there is concern for Costco's solvency.

Costco's quick and current ratios slightly increased therefore its liquidity has declined.

Costco's times interest earned ratio is high thus solvency is not a concern for Costco.