Question

In: Accounting

Based on the following information, compute the Working Capital and Current Ratio for both Amazon and...

  1. Based on the following information, compute the Working Capital and Current Ratio for both Amazon and Wal-Mart. Compare your conclusions concerning the liquidity of each company in relation to each other.

WAL-MART AMAZON

Current Assets $54,975 $17,490

Total Assets 193,406 25,278

Current Liabilities 62,300 14,896

Total Liabilities 117,645 17,521

WORKING CAPITAL

CURRENT RATIO

DEBT TO ASSET RATIO

Solutions

Expert Solution

Solution--

Wal-Mart Amazon
Current Assets $54,975 $17,490
Total Assets $193,406 $25,278
Current Liabilities $62,300 $14,896
Total Liabilties $117,645 $17,521

Working Capital = Current assets - Current Liabilities

For Wal-Mart

Working Capital = $54,975 - $62,300 = -$7,325

For Amazon

Working Capital = $17,490 - $14,896 = $2,594

Working capital of Amazon is higher which concludes that the company Amazon has current assets more than current liabilities which shows the high liquidity.

Current Ratio = Current assets / Current Liabilities

For Wal-Mart

Current Ratio = $54,975 / $62,300 = 0.88

For Amazon

Current Ratio = $17,490 / $14,896 = = 1.74

Ideal Current ratio is 1 which states that current assets = current liabilties. Higher the current ratio, better liquidity. So Current Ratio is 1.74 for Amazon which is greater than 1 and greater than the current ratio for Wal-Mart. It shows that Amazon is more abe to pay its short-term liabilities.

Debt to Asset Ratio = Total Liabilities / Total Assets

For Wal-Mart

Debt to Asset Ratio = $117,645 / $193,406 = 0.61

For Amazon

Debt to Asset Ratio = $17,521 / $25,278 = 0.69

Debt to asset ratio indicates whether the liabilities can be covered by the assets or not. It should be less than 1 because if its is greater than 1, it shows that Liabilties are more than the assets due to which risk or chances of bankcruptcy is high. So lower the debt to asset ratio, lower the risk.

Debt to Asset Ratio for Wal-Mart is low in comparison to Amazon which shows low risk and high liquidity.


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