Analysis and Interpretation of Liquidity and Solvency Balance sheets and income

Question

Analysis and Interpretation of Liquidity and Solvency Balance sheets and income statements for Costco Wholesale Corporation follow.

(a) Compute Costco’s liabilities-to-equity ratio for 2013 and 2012. (Round answers two decimal places.)

2013 liabilities-to-equity = Answer
2012 liabilities-to-equity = Answer


(b) Which of the following statements best describes Costco's financing risks?

Costco's liabilities-to-equity ratio increased during 2013 thus its solvency has improved.

Costco's times interest earned is exceptionally high thus there is concern for Costco's solvency.

Costco's quick and current ratios slightly increased therefore its liquidity has declined.

Costco's liabilties-to-equity ratio slightly increased, however, it has an exceptional times interest earned ratio. Consequently, solvency is not a concern.

Consolidated Statements of Earnings For Fiscal Years Ended ($ millions) September 1, 2013 September 2, 2012 August 28, 2011 Revenue Net Sales $102,870 $97,062 $87,048 Membership fees 2,286 2,075 1,867 Total revenue 105,156 99,137 88,915 Operating expenses Merchandise costs 91,948 86,823 77,739 Selling, general and administrative 10,104 9,518 8,691 Preopening expenses 51 37 46 Operating Income 3,053 2,759 2,439 Other income (expense) Interest expense (99) (95) (116) Interest income and other, net 97 103 60 Income before income taxes 3,051 2,767 2,383 Provision for income taxes 990 1,000 841 Net income including noncontrolling interests 2,061 1,767 1,542 Net income attributable to noncontrolling interests (22) (58) (80) Net income attributable to Costco $ 2,039 $ 1,709 $ 1,462

Explanation / Answer

Liability to equity= Total Liabilities/Total equity

2013 =19271/11012

=1.75

2012= 14622/12518

=1.17

The Statement that Costco's Liabilities to Equity Ratio slightly increased, however it has an exceptional times interest earned ratio consequenty the solvency is not a concern. It best describes Costco's Financial Risk

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