Question

Help I System Announcements Problem 13-5A Suppose selected financial data of Target and Wal-Mart for 2017 are presented here (in millions). Target Corporation Wal-Mart CTAR Inc. Income Statement Data for Year $66,900 45,000 15,000 700 $419,000 309,000 80,000 1,900 Net sales Cost of goods sold Selling and administrative expenses Interest expense Other income (expense) Income tax expense Net income (80) (390) 1,500 6,700 $4,620 21,010 Balance Sheet Data (End of Year) Current assets Noncurrent assets Total assets Current liabilities Long-term debt Total stockholders' equity $17,000 26,700 $43,700 $11,000 18,200 14,500 $45,000 120,000 $165,000 $55,000 45,000 65,000 24 F7 名。 F5 F3

Answer 1

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SOLUTION

(1) Current ratio

The current ratio is a liquidity ratio which calculates the ability of company to fulfill short term obligations. It is calculated as:

Current Assets / Current Liabilities

A ratio of 1:1 is optimal as it indicates that current assets can fully fulfill current liabilities.

For this calculation :

Target Company

$17,000 current assets / $11,000 current liabilities = 1.54 : 1

Walmart Company

$45,000 current assets / $55,000 current liabilities = 0.82 :1

(2) Accounts receivable turnover

Accounts receivable turnover is a kind of efficiency ratio which tests the companies ability to collect credit sales. The ratio is calculated as follows:

Net Credit Sales / Average Accounts and Notes Receivable.

For this calculation

Target Company

$66,900 / $7,700 = 8.68 times

Walmart Company

$419,000 / $4,200 = 99.76 times

(3) Average Collection period

It is the average number of days between the dates that credit sales were made, and the dates that the money was received/collected from the customers. The formula is :

365 days / Accounts Receivable Turnover Ratio

For this calculation

Target Company

365 / 8.68 times = 42.01 days

Walmart Company

365 / 99.76 times = 3.66 days

(4) Inventory turnover

Inventory turnover is also an efficiency ratio. It tells how many times a company has sold and repurchased inventory for stock. The ratio is calculated by:

Cost of Sales / Average Inventory.

For this calculation

Target Company

$45,000 / $6,800 = 6.61 times

Walmart Company

$309,000 / $34,500 = 8.96 times

(5) Days in inventory

Days in inventory is very similar to the inventory turnover ratio but it shows the exact number of days inventory are held in lieu of the number of times inventory turned during the year. The ratio is calculated :

Average Inventory / Cost of Goods Sold * 365 days

For this calculation:

Target Company

($6,800 / $45,000) x 365 = 55.15 days

Walmart Company

($34,500 / $309,000) x 365 = 40.75 days

(6) Profit margin ratio

The profit margin ratio is a profitability ratio which test the overall net income earned.The ratio is calculated:

Net Income / Net Sales

For this calculation :

Target Company

$4,602 / $66,900 = 6.87%

Walmart Company

$21,010 / $419,000 = 5.01%

(7) Assets Turnover

The total assets turnover is a ratio which tests how effectively a company utilizes its assets. The ratio is calculated :

Total Sales / Average Total Assets

For this calculation:

Target Company

$66,900 / ($43,000+$43,700) / 2 = 1.54 times

Walmart Company

$419,000 / ($165,000 + $165,000)/2 = 2.54 times

(8) Return on assets

Return on total assets is similar to total assets turnover. The ratio is calculated :

Earnings before interest and taxes / Total Net Assets.

For this calculation

Target Company

($4,620+$1,500+$700) / $43,700 = 15.61%

Walmart Company

($21,010+$1,900+$6,700) / $165,000 = 17.95%

(9) Return on common stockholders equity

Return on common stockholders equity reports the amount of net income is earned attributed to common shareholders. The ratio is calculated by

Net Income - Preferred Dividends / Average Common Stockholders Equity.

For this calculation

Target Company

$4,620 / ($14,500 + $12,600 )/2 = 34.10%

Walmart Company

$21,010 / ($65,000+$64,000)/2 = 32.57%

(10) Debts to Assets Ratio

It tells you the percentage of a company's total assets that were financed by creditors. Formula is :

Total Amount of a Company's Liabilities / Total Amount of Company's Assets

For this calculation

Target Company

$11,000 + $18,200 / $43,700 = 66.82%

Walmart Company

$55,000 + $45,000 / $165,000 = 60.61%

(11) Times Interest Earned

It tells a company's ability to meet the interest payments on its debt. The formula is :

Income before interest and taxes (EBIT) / Interest expense

For this calculation

Target Company

$4,620 + $1,500 + $700 / $700 = 9.74 times

Walmart Company

$21,010 + $1,900 + $6,700 / $1,900 = 15.58 times

(12) Free Cash Flows

Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. It is calculated as follows :

Cash flow from Operations - Capital Expenditure

For this calculation

Target Company

$5,500 - $1,800 = $ 3,700

Walmart Company

$25,800 - $12,300 = $13,500