Question

Integrative Inc. is a leading retailer specializing in consumer electronics. A condensed income statement and balance sheet for the Fiscal Year ended February 28, year 1 are shown below.

Integrative Inc.

Balance Sheet

At February 28, year 1

(In Millions)

Current Assets
Cash & Cash Equivalents	$504
Short-term investments	17
Accounts Receivable (net)	1,871
Inventory	4,771
Other current assets	1,066
Total current assets	8,229
Long-term assets	7,644
Total Assets	15,873
Current liabilities
Accounts payable	4,988
Other current liabilities	3,442
Total current liabilities	8,430
Long-term liabilities	2,741
Shareholders’ equity	4,701
Total liabilities & SE	15,873

Integrative Inc. Balance Sheet At February 28, year 1
Revenues	45,600
(Cost and Expenses)	(43,139)
Operating income	2,461
Other income/expense	(180)
Income before taxes	2,281
Income tax exp.	(670)
NET INCOME	1,611

Liquidity and solvency ratios for the industry are as follows:

                                      Industry Average

Current ratio                          1.23

Acid-test ratio                        0.60

Debt to equity                        0.70

Times interest earned          5.66 times

Required:

1. Determine the following ratios for Integrative for its fiscal year ended February 28, year 1.
   1. Current ratio
   2. Acid-test ratio
   3. Debt to equity ratio
   4. Times interest earned ratio

Using the ratios from requirement 1, assess Integrative’s liquidity and solvency relative to its industry

Answer 1

a) CURRENT RATIO

= CURRENT ASSETS ÷ CURRENT LIABILITIES

= $8229 ÷ $8430

= 0.98

b) ACID-TEST RATIO

= (CURRENT ASSETS - INVENTORY) ÷ CURRENT LIABILITIES

= ($8229 - $4771) ÷ $8430

= $3458 ÷ $8430

= 0.41

c) DEBT TO EQUITY RATIO

= TOTAL DEBT LIABILITIES ÷ TOTAL EQUITY

= ($8430+$2741) ÷ $4701

= 2.38

d) TIME INTEREST EARNED RATIO

= EBIT ÷ TOTAL INTEREDT EXPENSE

Here Operating income is referred as EBIT ( earnings before interest and tax) and interest is given in income statement as other expense

= $2461 ÷ 180

= 13.67 times

As the ratios of the company concerned, the company is lagging behind in industry in maintaining liquidity and in terms of insolvency, the company is more leveraged as its debt equity is significantly greater than industry's debt equity ratio, whereas in terms of meeting obligation of interest payments to its creditors, the company seems good as the times interest ratio is far higher than industry average.

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