- Review the Consolidated Balance Sheets on page 39. Calculate P&Gs 2020 Current Ratio (Current Assets / Current Liabilities).
- Current Ratio _____. Show your calculations: ______________________ ____________________________________________________________
- Review the Consolidated Balance Sheets on page 39. Calculate P&Gs 2020 Current Ratio (Current Assets / Current Liabilities).
- Current Ratio _____. Show your calculations: ______________________ ____________________________________________________________
- Look on page 77 of the textbook, Accounting: What the Numbers Mean, for the description of the Current Ratio. What Current Ratio do the authors' state is adequate to ensure the company can pay its current debts? Describe your evaluation of P&Gs current ratio as to whether there is a concern or no concern that P&G can pay its current debts.
- Textbook Acceptable Current Ratio ______. P&G current ratio of .85 (concern or no concern and why) ___________ Why? ___________________________________________________________ ___________________________________________________________
2020 2019 $ 16,181 $ 4.239 6.048 4.951 4,178 Consolidated Balance Sheets Amounts in millions except stated values: As of June 30 Assets CURRENT ASSETS Cash and cash equivalents Available-for-sale investment securities Accounts receivable NVENTORIES Materials and supplies Work in process Finished goods Total inventories Prepaid expenses and other current assets TOTAL CURRENT ASSETS PROPERTY, PLANT AND EQUIPMENT, NET GOODWILL TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET OTHER NONCURRENT ASSETS TOTAL ASSETS 1,414 1.289 674 612 3,410 3.116 5,498 5.017 2,130 2.218 27,987 22.473 20,692 21.271 39,901 40.273 23,792 24.215 8,328 6.863 $ 120,700 $ 115.095 $ 12,071 $ 9,722 11,183 32,976 23,537 6,199 11,110 73,822 11.260 9.054 9.697 30.011 20.395 6.899 10.211 67.516 Liabilities and Shareholders' Equity CURRENT LIABILITIES Accounts payable Accrued and other liabilities Debt due within one year TOTAL CURRENT LIABILITIES LONG-TERM DEBT DEFERRED INCOME TAXES OTHER NONCURRENT LIABILITIES TOTAL LIABILITIES SHAREHOLDERS' EQUITY Convertible Class A preferred stock, stated value $1 per share (600 shares authorized) Non-Voting Class B preferred stock, stated value $1 per share (200 shares authorized) Common stock, stated value $1 per share (10.000 shares authorized; shares issued: 2020 - 4,009.2, 2019 - 4,009.2) Additional paid-in capital Reserve for ESOP debt retirement Accumulated other comprehensive income (loss) Treasury stock, at cost (shares held: 2020 - 1,529 5, 2019 - 1,504.5) Retained earnings Noncontrolling interest TOTAL SHAREHOLDERS' EQUITY TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 897 928 4,009 4.009 64,194 63.827 (1,080) (1.146) (16,165) (14.936) (105,573) (100.406) 100,239 94.918 357 385 46,878 47,579 $ 120,700 $ 115.095 Liquidity is measured in three principal ways: Ign Working capital = Current assets Current liabilities Current ratio = Current assets Current liabilities Acid-test ratio = Cash (including temporary cash investments) + Accounts receivable Current liabilities a The dollar amount of a firm's working capital is not as significant as the ratio of its current assets to current liabilities because the amount can be misleading unless it is related to another quantity (how large is large?). Therefore, the trend of a company's current ratio is most useful in judging its current bill-paying ability. The acid-test ratio, also known as the quick ratio, is a more conservative short-term measure of liquidity because merchandise inventories are excluded from the computation. This ratio provides information about an almost worst-case situation-the firm's ability to meet its current obligations even if none of the inventory can be sold. LO 6 Discuss the significance and calculation of working capital, the current ratio, and the acid-test ratio. The liquidity measure calculations shown here use September 30, 2020, data from the balance sheet of Cruisers in Exhibit 3-1: Working capital Current assets Current liabilities = $118,319 $57, 424 = $60,895 $118,319 Current ratio = Current assets = 2.1 Current liabilities $57,424 Cash (including temporary cash Acid-test ratio investments) + Accounts receivable Current liabilities $22,286 + $42,317 $57,424 1.1 = = As a general rule, a current ratio of 2.0 and an acid-test ratio of 1.0 are considered indicative of adequate liquidity. From these data, it can be concluded that Cruisers Inc. has a high degree of liquidity; it should not have any trouble meeting its current obligations as they become due. In terms of debt-paying ability, the higher the current ratio, the better. Yet an overly high current ratio sometimes can be a sign that the company has not made the most productive use of its assets. In recent years, many large, well-managed corporations have made efforts to streamline operations by reducing their current ratios to the 1.0-1.5 range or even lower, with corresponding reductions in their acid-test ratios. So what motivates this practice? It's clear that investments in cash, accounts receivable, and inventories are being minimized because these current assets tend to be the least productive assets employed by the company. For example, what kind of ROI is earned on accounts receivable or inventory? Very little, if any. Funds freed up by reducing a company's investment in working capital items can be used to purchase new production equipment or to expand marketing efforts for existing
