exercise 3-17 (algo) calculating ratios; tech supplies lo3-8\ntech supplies company, incorporated, is a…

exercise 3-17 (algo) calculating ratios; tech supplies lo3-8\ntech supplies company, incorporated, is a leading retailer specializing in consumer electronics. a condensed income statement and balance sheet for the fiscal year ended january 28, 2023, are shown below.\ntech supplies company, incorporated\nbalance sheet\njanuary 28, 2023\n($ in millions)\nassets\ncurrent assets:\ncash and cash equivalents $1,996\naccounts receivable (net) 1,172\ninventory 5,053\nother current assets 396\ntotal current assets 8,617\nlong - term assets 3,643\ntotal assets $12,268\nliabilities and shareholders’ equity\ncurrent liabilities:\naccounts payable $4,558\nother current liabilities 2,675\ntotal current liabilities 7,225\nlong - term liabilities 2,220\nshareholders’ equity 2,815\ntotal liabilities and shareholders’ equity $12,268\ntech supplies company, incorporated\nincome statement\nfor the year ended january 28, 2023\n($ in millions)\nrevenues $39,538\ncosts and expenses 38,155\noperating income 1,383\nother income (expense)* (67)\nincome before income taxes 1,316\nincome tax expense 533\nnet income $783\n*includes $98 of interest expense.\nliquidity and solvency ratios for the industry are as follows:\nindustry average\ncurrent ratio 1.41\nacid - test ratio 0.62\ndebt to equity 0.72\ntimes interest earned 5.91 times\nrequired:\n1 - a. calculate the current ratio for tech supplies for its fiscal year ended january 28, 2023.\n1 - b. calculate the acid - test ratio for tech supplies for its fiscal year ended january 28, 2023.\n1 - c. calculate the debt to equity ratio for tech supplies for its fiscal year ended january 28, 2023.\n1 - d. calculate the times interest earned ratio for tech supplies for its fiscal year ended january 28, 2023.\n2. assess whether each ratio indicates higher or lower risk of tech supplies’s liquidity and solvency.

exercise 3-17 (algo) calculating ratios; tech supplies lo3-8\ntech supplies company, incorporated, is a leading retailer specializing in consumer electronics. a condensed income statement and balance sheet for the fiscal year ended january 28, 2023, are shown below.\ntech supplies company, incorporated\nbalance sheet\njanuary 28, 2023\n($ in millions)\nassets\ncurrent assets:\ncash and cash equivalents $1,996\naccounts receivable (net) 1,172\ninventory 5,053\nother current assets 396\ntotal current assets 8,617\nlong - term assets 3,643\ntotal assets $12,268\nliabilities and shareholders’ equity\ncurrent liabilities:\naccounts payable $4,558\nother current liabilities 2,675\ntotal current liabilities 7,225\nlong - term liabilities 2,220\nshareholders’ equity 2,815\ntotal liabilities and shareholders’ equity $12,268\ntech supplies company, incorporated\nincome statement\nfor the year ended january 28, 2023\n($ in millions)\nrevenues $39,538\ncosts and expenses 38,155\noperating income 1,383\nother income (expense)* (67)\nincome before income taxes 1,316\nincome tax expense 533\nnet income $783\n*includes $98 of interest expense.\nliquidity and solvency ratios for the industry are as follows:\nindustry average\ncurrent ratio 1.41\nacid - test ratio 0.62\ndebt to equity 0.72\ntimes interest earned 5.91 times\nrequired:\n1 - a. calculate the current ratio for tech supplies for its fiscal year ended january 28, 2023.\n1 - b. calculate the acid - test ratio for tech supplies for its fiscal year ended january 28, 2023.\n1 - c. calculate the debt to equity ratio for tech supplies for its fiscal year ended january 28, 2023.\n1 - d. calculate the times interest earned ratio for tech supplies for its fiscal year ended january 28, 2023.\n2. assess whether each ratio indicates higher or lower risk of tech supplies’s liquidity and solvency.

Answer

Explanation:

Step1: Recall current - ratio formula

The current - ratio formula is $\text{Current Ratio}=\frac{\text{Total Current Assets}}{\text{Total Current Liabilities}}$. From the balance sheet, total current assets = $$8,617$ million and total current liabilities = $$7,225$ million.

Step2: Calculate current ratio

$\text{Current Ratio}=\frac{8617}{7225}\approx1.19$.

Step3: Recall acid - test ratio formula

The acid - test ratio formula is $\text{Acid - Test Ratio}=\frac{\text{Cash and Cash Equivalents}+\text{Accounts Receivable (net)}+\text{Other Current Assets}}{\text{Total Current Liabilities}}$. Cash and cash equivalents = $$1,996$ million, accounts receivable (net) = $$1,172$ million, other current assets = $$396$ million, and total current liabilities = $$7,225$ million.

Step4: Calculate acid - test ratio

$\text{Acid - Test Ratio}=\frac{1996 + 1172+396}{7225}=\frac{3564}{7225}\approx0.49$.

Step5: Recall debt - to - equity ratio formula

The debt - to - equity ratio formula is $\text{Debt to Equity Ratio}=\frac{\text{Total Liabilities}}{\text{Shareholders' Equity}}$. Total liabilities = Total current liabilities+Long - term liabilities=$7225 + 2220=$9445$ million, and shareholders' equity = $$2,815$ million.

Step6: Calculate debt - to - equity ratio

$\text{Debt to Equity Ratio}=\frac{9445}{2815}\approx3.36$.

Step7: Recall times interest earned ratio formula

The times interest earned ratio formula is $\text{Times Interest Earned}=\frac{\text{Income Before Interest and Taxes}}{\text{Interest Expense}}$. Income before income taxes = $$1,316$ million and interest expense = $$98$ million.

Step8: Calculate times interest earned ratio

$\text{Times Interest Earned}=\frac{1316}{98}\approx13.43$.

Answer:

1-a. The current ratio is approximately $1.19$. 1-b. The acid - test ratio is approximately $0.49$. 1-c. The debt - to - equity ratio is approximately $3.36$. 1-d. The times interest earned ratio is approximately $13.43$. 2.

  • Current ratio: The industry average current ratio is $1.41$, and Tech Supplies' current ratio of $1.19$ is lower. A lower current ratio may indicate a higher risk of short - term liquidity problems as there are relatively fewer current assets to cover current liabilities.
  • Acid - test ratio: The industry average acid - test ratio is $0.62$, and Tech Supplies' acid - test ratio of $0.49$ is lower. This implies a higher risk in terms of quick liquidity since there are fewer quick assets to pay off current liabilities immediately.
  • Debt - to - equity ratio: The industry average debt - to - equity ratio is $0.72$, and Tech Supplies' ratio of $3.36$ is much higher. A higher debt - to - equity ratio indicates higher financial leverage and higher long - term solvency risk as the company has a larger proportion of debt compared to equity.
  • Times interest earned ratio: The industry average times interest earned ratio is $5.91$ times, and Tech Supplies' ratio of $13.43$ times is higher. A higher times interest earned ratio indicates that the company is in a better position to cover its interest expenses, suggesting lower risk related to meeting interest obligations.