Chapter Two - Wiley

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86 CHAPTER 2 A Further Look at Financial Statements
Compute liquidity ratios and
compare results.
(SO 7)
Compute and interpret
solvency ratios.
(SO 7, 8)
E2-7 Nordstrom, Inc. operates department stores in numerous states. Selected financial
statement data (in millions of dollars) for the year ended January 31, 2002, are as
follows.
End of Year Beginning of Year
Cash and cash equivalents $ 331 $ 25
Receivables (net) 698 722
Merchandise inventory 888 946
Other current assets 137 120
Total current assets $2,054 $1,813
Total current liabilities $ 948 $ 951
For the year, net sales were $5,634,000 and cost of goods sold was $3,766,000.
Instructions
(a) Compute the working capital and current ratio at the beginning of the year and at
the end of the current year.
(b) Did Nordstrom’s liquidity improve or worsen during the year?
(c) Using the data in the chapter, compare Nordstrom’s liquidity with Best Buy’s.
E2-8 The following data were taken from the 2002 and 2001 financial statements of
Lands’ End, Inc. (All dollars in thousands.)
2002 2001
Current assets $402,584 $319,073
Total assets 599,120 507,629
Current liabilities 185,564 178,874
Total liabilities 198,402 193,441
Total stockholders’ equity 400,718 314,188
Cash provided by operating activities 73,505 60,564
Cash used in investing activities 40,514 44,553
Instructions
Perform each of the following.
(a) Calculate the debt to total assets ratio for each year.
(b) Calculate the cash debt coverage ratio for each year. (Total liabilities at year-end
2000 were $160,000,000.)
(c) Discuss Lands’ End, Inc.’s solvency in 2002 versus 2001.
(d) Discuss Lands’ End, Inc.’s ability to finance its investment activities with cash provided
by operating activities, and how any deficiency would be met.
Problems: Set A
Comment on the objectives
and qualitative characteristics
of accounting information.
(SO 1, 2)
P2-1A Net Nanny Software International Inc., headquartered in Vancouver, specializes
in Internet safety and computer security products for both the home and enterprise
markets. Its balance sheet, as at June 30, 1999, reported a deficit (negative retained earnings)
of US $5,678,288. It has reported only net losses since inception, June 30, 1996. In
spite of these losses, Net Nanny’s common shares have traded anywhere from a high of
$3.70 to a low of $0.32 on the Canadian Venture Exchange.
Net Nanny’s financial statements of the company have historically been prepared in
Canadian dollars. As of June 30, 1998, the company adopted the U.S. dollar as its reporting
currency.
Instructions
(a) What is the objective of financial reporting? How does this objective meet or not
meet Net Nanny’s investor’s needs?
(b) Why would investors want to buy Net Nanny’s shares if the company has consistently
reported losses over the last few years? Include in your answer an assessment
of the relevance of the information reported on Net Nanny’s financial statements.