Math  /  Data & Statistics

QuestionAmazon.com, Inc. (AMZN) is one of the largest Internet retailers in the world. Best Buy, Co. Inc. (BBY) is a leading retailer of consumer electronics and media products in the United States. Amazon and Best Buy compete in similar markets; however, Best Buy sells through both traditional stores and the Internet, while Amazon sells only through the Internet. Current asset and current liability information from recent financial statements are as follows (in millions): Current assets: Cash Short-term investments Amazon Best Buy 31,75031,750 1,980 Accounts receivable 9,500 16,677 1,015 Inventories 17,174 5,409 Other current assets 466 Total current assets 75,10175,101 8,870 Current liabilities: Accounts payable 38,19238,192 5,257 Other current liabilities 30,199 2,256 Total current liabilities 68,39168,391 7,513 Required: a. Compute working capital for each company. Amazon: millionBestBuy: million Best Buy: million b. Compute the current ratio for each company. Round your answers to one decimal place. Amazon: Best Buy: c. Compute the quick ratio for each company. Round your answers to one decimal place. Amazon: Best Buy: d. Can the working capital be usefully compared between the two companies? Which of the following statements is correct. e. Which company has the greater debt-paying ability according to the current ratio? f. Which company has the greater short-term debt-paying ability according to the quick ratio? g. Why are the results different between (e) and (f)? (Hint: Perform a vertical analysis of the current assets.) Round your answers to one decimal place. If an amount is zero, enter "0". Amazon Best Buy Current assets: Cash % % Short-term investments % % Accounts receivable % %

Studdy Solution

STEP 1

1. Working capital is calculated as current assets minus current liabilities.
2. The current ratio is calculated as current assets divided by current liabilities.
3. The quick ratio is calculated as (current assets - inventories) divided by current liabilities.
4. The financial data provided is accurate and complete for the calculations.

STEP 2

1. Calculate working capital for each company.
2. Calculate the current ratio for each company.
3. Calculate the quick ratio for each company.
4. Compare working capital between the two companies.
5. Determine which company has the greater debt-paying ability according to the current ratio.
6. Determine which company has the greater short-term debt-paying ability according to the quick ratio.
7. Perform a vertical analysis of the current assets to explain the differences in results.

STEP 3

Calculate working capital for Amazon:
Working Capital (Amazon)=Total Current Assets (Amazon)Total Current Liabilities (Amazon) \text{Working Capital (Amazon)} = \text{Total Current Assets (Amazon)} - \text{Total Current Liabilities (Amazon)}
Working Capital (Amazon)=75,10168,391=6,710 \text{Working Capital (Amazon)} = 75,101 - 68,391 = 6,710

STEP 4

Calculate working capital for Best Buy:
Working Capital (Best Buy)=Total Current Assets (Best Buy)Total Current Liabilities (Best Buy) \text{Working Capital (Best Buy)} = \text{Total Current Assets (Best Buy)} - \text{Total Current Liabilities (Best Buy)}
Working Capital (Best Buy)=8,8707,513=1,357 \text{Working Capital (Best Buy)} = 8,870 - 7,513 = 1,357

STEP 5

Calculate the current ratio for Amazon:
Current Ratio (Amazon)=Total Current Assets (Amazon)Total Current Liabilities (Amazon) \text{Current Ratio (Amazon)} = \frac{\text{Total Current Assets (Amazon)}}{\text{Total Current Liabilities (Amazon)}}
Current Ratio (Amazon)=75,10168,3911.1 \text{Current Ratio (Amazon)} = \frac{75,101}{68,391} \approx 1.1

STEP 6

Calculate the current ratio for Best Buy:
Current Ratio (Best Buy)=Total Current Assets (Best Buy)Total Current Liabilities (Best Buy) \text{Current Ratio (Best Buy)} = \frac{\text{Total Current Assets (Best Buy)}}{\text{Total Current Liabilities (Best Buy)}}
Current Ratio (Best Buy)=8,8707,5131.2 \text{Current Ratio (Best Buy)} = \frac{8,870}{7,513} \approx 1.2

STEP 7

Calculate the quick ratio for Amazon:
Quick Ratio (Amazon)=Total Current Assets (Amazon)Inventories (Amazon)Total Current Liabilities (Amazon) \text{Quick Ratio (Amazon)} = \frac{\text{Total Current Assets (Amazon)} - \text{Inventories (Amazon)}}{\text{Total Current Liabilities (Amazon)}}
Quick Ratio (Amazon)=75,10117,17468,3910.8 \text{Quick Ratio (Amazon)} = \frac{75,101 - 17,174}{68,391} \approx 0.8

STEP 8

Calculate the quick ratio for Best Buy:
Quick Ratio (Best Buy)=Total Current Assets (Best Buy)Inventories (Best Buy)Total Current Liabilities (Best Buy) \text{Quick Ratio (Best Buy)} = \frac{\text{Total Current Assets (Best Buy)} - \text{Inventories (Best Buy)}}{\text{Total Current Liabilities (Best Buy)}}
Quick Ratio (Best Buy)=8,8705,4097,5130.5 \text{Quick Ratio (Best Buy)} = \frac{8,870 - 5,409}{7,513} \approx 0.5

STEP 9

Compare working capital:
Amazon has a working capital of \$6,710 million, while Best Buy has a working capital of \$1,357 million. Working capital can be compared to understand liquidity, but differences in business models and scale must be considered.

STEP 10

Determine greater debt-paying ability according to the current ratio:
Best Buy has a greater current ratio (1.2) compared to Amazon (1.1), indicating a better debt-paying ability.

STEP 11

Determine greater short-term debt-paying ability according to the quick ratio:
Amazon has a greater quick ratio (0.8) compared to Best Buy (0.5), indicating a better short-term debt-paying ability.

STEP 12

Perform vertical analysis of current assets:
Calculate the percentage of each component of current assets for both companies to explain differences in ratios.
For Amazon: - Cash and Short-term investments: 31,750+1,98075,101×10045.0% \frac{31,750 + 1,980}{75,101} \times 100 \approx 45.0\% - Accounts receivable: 9,50075,101×10012.6% \frac{9,500}{75,101} \times 100 \approx 12.6\% - Inventories: 17,17475,101×10022.9% \frac{17,174}{75,101} \times 100 \approx 22.9\%
For Best Buy: - Cash and Short-term investments: 1,0158,870×10011.4% \frac{1,015}{8,870} \times 100 \approx 11.4\% - Accounts receivable: 4668,870×1005.3% \frac{466}{8,870} \times 100 \approx 5.3\% - Inventories: 5,4098,870×10061.0% \frac{5,409}{8,870} \times 100 \approx 61.0\%
Amazon has a higher proportion of liquid assets (cash and short-term investments), which explains the higher quick ratio compared to Best Buy.

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