E2-9 Nordstrom, Inc. operates department stores in numerous states. Selected financial statement data (in millions of dollars) for a recent year follow. Beginning of Year End of Year Cash and cash equivalents Receivables (net) Merchandise inventory Other current assets $ 72 1,942 $358 1,788 956 900 303 259 Total current assets $3,217 $3,361 $1,601 $1,635 Total current liabilities Instructions (a) Compute working capital and the current ratio at the beginning of the year and at the end of the 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 (see page 55). SOTO) of Myeneke Corporation requested that the ac- 55 Analyzing the Financial Statements a significantly different current ratios. Illustration 2-14 shows the 2014 and 2013 current ratios for Best Buy and for hhgregg, along with the 2014 industry average. ILLUSTRATION 2-14 Current Ratio- Current Assets Current Liabilities Current ratio Best Buy (S in millions) Industry Average hhgregg 2013 2014 2014 2014 $10,485 = 1.41:1 1.11:1 1.68:1 .88:1 $7,436 What does the ratio actually mean? Best Buy's 2014 current ratio of 1.41:1 means that for every dollar of current liabilities, Best Buy has $1.41 of current assets, Best Buy's current ratio increased in 2014. When compared to the indus- try average of .88:1, Best Buy's liquidity seems strong. It is lower than hhgregg's but not significantly so. One potential weakness of the current ratio is that it does not take into ETHICS NOTE account the composition of the current assets. For example, a satisfactory cur- A company that has more rent ratio does not disclose whether a portion of the current assets is tied up in current assets than current slow-moving inventory. The composition of the current assets matters because a dollar of cash is more readily available to pay the bills than is a dollar of inven- liabilities by using cash to pay tory. For example, suppose a company's cash balance declined while its mer- chandise inventory increased substantially. If inventory increased because the company is having difficulty selling its products, then the current ratio might not fully reflect the reduction in the company's liquidity. liabilities can increase the ratio of current assets to current off some current liabilities. This gives the appearance of being more liquid. Do you think this move is ethical? ACCOUNTING ACROSS THE ORGANIZATION REL Consultancy Group Can a Company Be Too Liquid? excess working capital of $1.017 trillion in a recent year. This was an 18% increase, which REL said represented a "deterioration in the management of operations." Given that managers throughout a company are interested in improving profitability, it is clear that they should have an eye toward managing working capital. They need to aim for a "Goldilocks solution"-not too much, not too little, but just right. There actually is a point where a company can be too liquid-that is, it can have too much working capi- tal. While it is important to be liquid enough to be able to pay short-term bills as they come due, a company does not want to tie up its cash in extra inventory or receivables that are not earning the company money. By one estimate from the REL Consultancy Group, the thousand largest U.S. companies had cumulative Source: Maxwell Murphy, "The Big Number," Wall Street Journal (November 9, 2011). What can various company managers do to ensure that working capital is managed efficiently to maximize net income? (Go to WileyPLUS for this answer and additional Jorge Salcedo/iStockphoto questions.) Solvency Now suppose that instead of being a short-term creditor, you are interested in either buying Best Buy's stock or extending the company a long-term loan. Long- term creditors and stockholders are interested in a company's solvency-its abil- *y to pay interest as it comes due and to repay the balance of a debt due at its