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Analyze and compare Alphabet (Google) and Microsoft Alphabet Inc. (GOOG) and Microsoft Corporation (MSFT) design and distribute consumer and enterprise software, including overlaps in search, business productivity, and mobile operating systems. Alphabet’s primary source of revenue is from advertising, while Microsoft’s is from software subscription and support fees. The following year-end data (in millions) were taken from recent balance sheets for both companies: a. Compute the working capital for each company for both years. b. Which company has the larger working capital at the end of Year 2? c. Is working capital a good measure of relative liquidity in comparing the two companies? Explain. d. Compute the current ratio for both companies. Round to one decimal place. e. Which company has the larger relative liquidity based on the current ratio? f. Based on your analysis, comment on the short-term debt-paying ability of these two companies.

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Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663

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Chapter
Section
BuyFindarrow_forward

Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663
Chapter 4, Problem 6MAD
Textbook Problem
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Analyze and compare Alphabet (Google) and Microsoft

Alphabet Inc. (GOOG) and Microsoft Corporation (MSFT) design and distribute consumer and enterprise software, including overlaps in search, business productivity, and mobile operating systems. Alphabet’s primary source of revenue is from advertising, while Microsoft’s is from software subscription and support fees. The following year-end data (in millions) were taken from recent balance sheets for both companies:

Chapter 4, Problem 6MAD, Analyze and compare Alphabet (Google) and Microsoft Alphabet Inc. (GOOG) and Microsoft Corporation

  1. a. Compute the working capital for each company for both years.
  2. b. Which company has the larger working capital at the end of Year 2?
  3. c. Is working capital a good measure of relative liquidity in comparing the two companies? Explain.
  4. d. Compute the current ratio for both companies. Round to one decimal place.
  5. e. Which company has the larger relative liquidity based on the current ratio?
  6. f. Based on your analysis, comment on the short-term debt-paying ability of these two companies.

a.

To determine

Compute the working capital for Company M and Company A for both the years.

Explanation of Solution

Working capital: Working capital refers to the excess amount of current assets over its current liabilities of a business. It measures the excess funds that are required for the companies to carry out their day to day operations, excluding any new funds that have been invested during the year. Working capital is calculated by using the formula:

Working capital=Current assetsCurrent liabilities

Compute the working capital of Company M for Year 2 and Year 1:

ParticularsYear 2Year 1
Current assets$139,660$122,797
Less: Current liabilities($59,357)($49,647)
Workin

b.

To determine

Identify the company that has the larger working capital at the end of year 2.

c.

To determine

Explain whether working capital is a good measure of relative liquidity in comparing two companies.

d.

To determine

Compute the current ratio for Company M and Company A for both the years.

e.

To determine

Identify the company that has the larger liquidity based on the current ratio.

f.

To determine

Comment on the short-term debt-paying ability of these two companies.

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Chapter 4 Solutions

Financial And Managerial Accounting
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