Question

Selected balance sheet and income statement information for the jewelry retailer, Tiffany & Co. for 2011 through 2013 follows:

($millions)	2013	2012	2011
Net sales	$3,794	$3,643	$3,085
Interest expense	59	49	54
Pretax income	644	665	547
Net income	416	439	368
Current assets	3,152	2,890	2,685
Total assets	4,631	4,159	3,736
Current liabilities	587	627	480

Required

1. Compute the current ratio for each year and discuss any trends. Do you feel that the company is sufficiently liquid? Explain. What additional information might be helpful in analyzing the liquidity?
2. Compute times interest earned for each year and discuss any trends. Do you have any concerns about its level of financial leverage and its ability to meet interest obligations? Explain.

Answer 1

Solution.

1

Current ratio = current assets/ current liabilities

Current ratio for year 2013 = 3152/587 = 5.37

Current ratio for year 2012 =2890/627= 4.61

Current ratio for year 2011 =2685/480 = 5.59

According to current ratio analysis the ratio of 2011 and 2013 is more then 2012 that's why in 2011 and 2013 the company is able to use its current assets to pay its debt and liabilities.

The Calculations of quick ratio can also help helpful in analysing the liquidity and give out the information and analysis that the company has to sell inventory to meets it's current debt obligations.

2

Time interest earned= income before interest and tax( pretax income / interest expense

For 2013 =644/59 =10.91

For 2012 = 665/49=13.57

For 2011 =547/54=10.12

No there is no concern about the level of financial leverage of company and its ability to meet interest obligation. Infact company has highest time interest earned ratio in 2012 which is 13.57 ( higher then 2011 and 2013)