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a. (1) Current year’s current ratio. 1,3 Current position analysis Obi. 3 PepsiCo, Inc. (PEP), the parent company of Frito-Lay snack foods and Pepsi beverages, had the following current assets and current liabilities at the end of two recent years: Current Year (in millions) Previous Year (in millions) Cash and cash equivalents $ 9,158 $ 9,096 Short-term investments, at cost 6,967 2,913 Accounts and notes receivable, net 6,694 6,437 Inventories 2,723 2,720 Prepaid expenses and other current assets 1,547 1,865 Short-term obligations 6,892 4,071 Accounts payable 14,243 13,507 a. Determine the (1) current ratio and (2) quick ratio for both years. Round to one decimal place. b. What conclusions can you draw from these data about PepsiCo’s liquidity?

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Corporate Financial Accounting

15th Edition
Carl Warren + 1 other
Publisher: Cengage Learning
ISBN: 9781337398169
BuyFindarrow_forward

Corporate Financial Accounting

15th Edition
Carl Warren + 1 other
Publisher: Cengage Learning
ISBN: 9781337398169
Chapter 14, Problem 14.7EX
Textbook Problem
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a. (1) Current year’s current ratio. 1,3

Current position analysis    Obi. 3

PepsiCo, Inc. (PEP), the parent company of Frito-Lay snack foods and Pepsi beverages, had the following current assets and current liabilities at the end of two recent years:

  Current Year (in millions) Previous Year (in millions)
Cash and cash equivalents $ 9,158 $ 9,096
Short-term investments, at cost 6,967 2,913
Accounts and notes receivable, net 6,694 6,437
Inventories 2,723 2,720
Prepaid expenses and other current assets 1,547 1,865
Short-term obligations 6,892 4,071
Accounts payable 14,243 13,507

a. Determine the (1) current ratio and (2) quick ratio for both years. Round to one decimal place.

b. Chapter 14, Problem 14.7EX, a. (1) Current years current ratio. 1,3 Current position analysisObi. 3 PepsiCo, Inc. (PEP), the What conclusions can you draw from these data about PepsiCo’s liquidity?

a.

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

To compute: Current and acid-test ratio for current year and previous year.

Explanation of Solution

1.

Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.  Current assets include cash and cash equivalents, short-term investments, net, accounts and notes receivables, net, inventories, and prepaid expenses and other current assets. Current liabilities include short-term obligations and accounts payable.  

Formula:

Current ratio=Current assetsCurrentliabilities

Total current assets are determined as follows:

Particulars Current year ($) Previous year ($)
Cash and cash equivalents 9,158 9,096
Short-term investments 6,967 2,913
Accounts and notes receivables 6,694 6,437
Inventories 2,723 2,720
Prepaid expenses and other current assets 1,547 1,865
Total 27,089 23,031

Total liabilities are determined as below:

Particulars Current year ($) Previous year ($)
Short-term obligations 6,892 4,071
Accounts payable 14,243 13,507
Total 21,135 17,578

Thus, current ratio for current year and previous year are determined as below:

Current ratio for current year

Current ratio=Current assetsCurrentliabilities=$27,089$21,135=1.28

Current ratio for previous year

Current ratio=Current assetsCurrentliabilities=$23,031$17,578=1.31

(2)

Acid-Test Ratio is the ratio denotes that this ratio is a more rigorous test of solvency than the current ratio. It is determined by dividing quick assets and current liabilities. The acceptable acid-test ratio is 0.90 to 1.00. Use the following formula to determine the acid-test ratio:

Acid Ratio=Quick assetsCurrentliabilities

Quick Assets are those assets that are most liquid

b.

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

To provide: Conclusion towards company’s ratios

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Chapter 14 Solutions

Corporate Financial Accounting
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