Question

Case 3: Deere & Company

Presented below is the SEC-mandated disclosure of contractual obligations provided by Deere & Company in a recent annual report. Deere & Company reported current assets of $50,060 and total current liabilities of $21,394 at year-end. (All dollars are in millions.)

Aggregate Contractual Obligations The payment schedule for the company's contractual obligations at year-end in millions of dollars is as follows:
		Total		Less than 1 year		1–3 years		4 and 5 years		More than 5 years
Debt
Equipment operations		$  5,091		$    434		$   270		$   775		$ 3,612
Financial services		31,692		9,962		11,477		6,578		3,675
Total		36,783		10,396		11,747		7,353		7,287
Interest on debt		4,777		609		1,069		745		2,354
Accounts payable		2,743		2,611		90		39		3
Capital leases		87		39		42		4		2
Purchasing obligations		3,007		2,970		37		—		—
Operating leases		371		121		134		70		46
Total		$ 47,768		$ 16,746		$13,119		$ 8,211		$ 9,692

Instructions

a.   

Compute Deere & Company’s working capital and current ratio (current assets ÷ current liabilities) with and without the off-balance-sheet contractual obligations reported in the schedule.

b.   

Briefly discuss how the information provided in the contractual obligation disclosure would be useful in evaluating Deere & Company for loans (1) due in one year and (2) due in five years.

Answer 1

1. Calculation of Working Capital: -

Current Assets – Current Liabilities

= $50,060 - $21,394

= $28,666

Calculation of Current Ratio: -

Current Assets/ Current Liabilities

= $50,060/ $21,394

= 2.34

With Off-balance Sheet contractual Obligation: -

Now current liabilities should include purchasing obligations and operating leases which are for less than 1 year

Therefore,

Working capital: -

= $50,060 – ($21,394 + $2,970 + $121)

= $50,060 - $24,485

= $25,575

Current Ratio: -

= $50,060/ $24,485

= 2.04

2. On the basis of information available in above part, company possesses a good liquidity position. Working capital of $25,575 billion is available to pay short term debt.

The additional contractual obligations are also very significant in assessing the capacity of company to pay its loan that will mature after one year.

$13,119 in the 2^nd and 3^rd year

$8,211 in year 4^th and 5^th