EXERCISE 2-2 2007 CA_ Prepaid expenses PPE Machinery and equipment 1A_ Trademarks CL_ Dividends payable CL_ Taxes payable SE Retained earnings CA Accounts receivable EXERCISE 2-7 (a) Debtto total assets $570,172 ratio $1,987,484 = 28.7% <|- Ia Dep r- loo -3| ake ole be| Land held for future use Patents: Bonds payable Common stock Accumulated depreciation Unearned revenue Inventory 2006 $450,097 $1,605,649 = 28.0% (c) Using the debt to total assets ratio and free cash flow as measures of solvency produces mixed results for American Eagle Outtitters. Its debt to total assets ratio increased slightly from 28.0% for 2006 to 28.7% for 2007 indicating a decline in solvency for 2007. In contrast, its free cash flow increased by 29% indicating a good improvement in solvency.EXERCISE 2-8 (a) (b) (c) Beginning of Year End of Year Working capital $2,874 - $1,623 = $1,251 $2,742 - $1,433 = $1,309 ji $2,874 _ 4 7, $2,742 _ 4 og. Current ratio Stez3 7177" Stas ttt Nordstrom’s liquidity increased during the year. Its current ratio increased from 1.77:1 to 1.91:1. Also, Nordstrom’s working capital increased by $58 million. Nordstrom’s current ratio at both the beginning and the end of the recent year exceeds Best Buy’s current ratio for 2007 (and 2006). Nordstrom's end-of-year current ratio (1.91) exceeds Best Buy's 2007 current ratio (1.44). Nordstrom would be considered more liquid than Best Buy for the recent year.PROBLEM 2-44, (a) Spiderman Company appears to be more profitable. Its net income for 2007 is $74,000 ($504,000 — $248,000 — $132,000 — $6,000 - $44,000). Its earnings per share is $1.85 ($74,000 + 40,000 shares outstanding). Batman’s net income for 2007 is $29,000 ($269,000 — $130,000 — $80,000 — $12,000 — $18,000). Its earnings per share is $.97 ($29,000 + 30,000 shares outstanding). (b) Batman appears to be more liquid. Batman’s 2007 working capital of $102,000 ($146,000 - $44,000) is 34% higher than Spiderman’s working capital of $76,000 ($182,000 - $106,000). In addition, Batman's 2007 current ratio of 3.3:1 ($146,000 + $44,000) is almost double Spiderman’s current ratio of 1.7:1 ($182,000 + $106,000). (c) Batman appears to be slightly more solvent. Batman’s 2007 debt to total assets ratio of 52.2% ($131,000 + $251,000)* is lower than Spiderman’s ratio of 54.9% ($147,000 + $268,000)”. The lower the percentage of debt to total assets, the lower the risk that a company may be unable to pay its debts as they come due. Another measure of solvency, free cash flow, also indicates that Batman is more solvent. Batman had $13,000 ($36,000 ~ $15,000 - $8,000) of free cash flow while Spiderman had only $5,000 ($43,000 - $28,000 — $10,000). ($44,000 + $87,000) is Batman's 2007 total liabilities. $251,000 ($146,000 + $105,000) is Batman's 2007 total assets. °$147,000 ($106,000 + $41,000) is Spiderman’s 2007 total liabilities. $268,000 ($182,000 + $86,000) is Spiderman’s 2007 total assets.(a) (b) (c) (d) (e) () PROBLEM 2-68 2006 2007 Earnings per share. $15,000 $18,000 20,000 shares ~ *7® 000 shares = °° Working capital. (89,000 + $14,000 + $4,000) - ($10,500 + $18,000 + $5,700) — $23,000 = $4,000 $25,000 = $9,200 Current ratio. $27,000 _ $34,200 $23,000 $25,000 Debt to total assets ratio. $59,000 $61,000 $59,000 _ $61,000 _ 85,000 = °°4% $102,000 ~ 598% Free cash flow. $13,000 ~ $8,000 ~ $3,000 $20,000 ~ $11,000 - $5,000 = $2,000 = $4,000 Net income and earnings per share have increased indicating that the underlying profitability of the corporation has improved. The liquidity of the corporation as shown by the working capital and the current ratio has also Improved. Finally, the corporation Improved Its solvency by Improving its debt to total assets ratio as well as free cash flow.