Question

Loblaw Companies Limited (Loblaw) is a Canadian food retailer that owns 1,000 corporate and

franchise supermarkets that operate under 22 regional and market segment banners. Loblaw

brands include President’s Choice, No Name, Joe Fresh, T&T, Everyday Living, Exact,

Seaquest, Azami, and Teddy’s Choice. Loblaw is a public company, and its shares are listed on

the Toronto stock exchange.

Below you will find the 2016 and 2015 consolidated balance sheets (statement of financial

position). You will also find some excerpts from its notes section. All amounts are in millions of

Canadian dollars.

The fiscal year of the Company ends on the Saturday closest to December 31. Any references

below to 2015 relate to the fiscal year ended January 2, 2016, and any references below to 2016

relate to the fiscal year ended December 31, 2016.

REQUIRED:

a) Calculate the following ratios for both 2016 and 2015:

a. Current ratio

b. Quick ratio

b) (3marks) Based on your calculation in a), comment on the liquidity of Loblaw and how/if

it has changed between fiscal year 2015 and 2016.

c) Cost of goods sold is $33,213 million for 2016 and $32,846 million for 2015.

Inventory balance was $4,309 million for 2014. Calculate the followings for both 2016

and 2015:

a. Inventory turnover

b. Days to sell inventory

d) Based on the brief description of Loblaw and your understanding of retail

business operations, do you think your calculations in c) are reasonable and why?

e) Use the information below from Note 12 “Inventories” and answer the

following:

a. Prepare a journal entry to record the write-down of inventories.

b. Give two examples and explain why a write-down of inventories is necessary for

Loblaw.

Note 12 Inventories

For inventories recorded as at December 31, 2016, the Company recorded $22 million as

an expense for the write-down of inventories below cost to net realizable value. The

write-down was included in cost of merchandise inventories sold.

f) Calculate the debt-to-equity ratio for 2016. Explain what this ratio measures

and why creditors want to see this ratio.

g) Answer the following questions:

a. Loblaw has unlimited number of authorized shares on each class of shares. Why

do many companies today prefer to have an unlimited authorized number of

shares?

b. List and explain three differences between common shares and preferred shares.

c. Based on the information available, are you able to determine the net income for

the year ended December 31, 2016? Show your detailed calculations or explain

why not.

d. The unit price for Loblaw’s common shares was $70.33 on December 31, 2016

and $63.92 on December 31, 2015. Note 24 “Share Capital” (not provided)

indicated the following:

2016 2015

Dividends declared per share ($):

Common Share $1.03(2016)   $0.0995 (2015)

What is the dividend yield for common shareholders in each of 2016 and 2015? If

you are a common shareholder, are you happy to see the change and why? (3

marks)

Loblaw Companies Limited

Consolidated Balance Sheet

As of December 31

(in millions of Canadian Dollars)

2016 2015

Assets

Current Assets

Cash and cash equivalents $ 1,314 $ 1,018

Short term investments 241 64

Accounts receivable 4,048 4,115

Inventories 4,371 4,322

Prepaid expenses and other assets 230 336

Total Current Assets $ 10,204 $ 9,855

Non-current Assets

Fixed assets 11,592 11,558

Intangible assets 8,745 9,164

Goodwill 3,895 3,780

Total Non-current Assets $ 24,232 $ 24,502

Total Assets $ 34,436 $ 34,357

Liabilities

Current Liabilities

Bankindebtedness $ 115 $ 143

Trade payables 5,091 5,106

Provisionsand other liabilities 1,736 1,973

Total Current Liabilities $ 6,942 $ 7,222

Non-Current liabilities

Long term debt and other liabilities $ 14,466 $ 14,011

Total liabilities $ 21,408 $ 21,233

Equity

Share capital $ 7,913 $ 8,072

Retained Earnings 4,944 4,914

Contributed surplus 112 102

Accumulated other comprehensive

income 33 23

Non-controlling interest 26 13

Total Equity $ 13,028 $ 13,124

Total Liabilities and Equity $ 34,436 $ 34,357

Answer 1

Answer(1): Calculating for 2015-

Current Ratio = Current assets / current liabilities

Current ratio: 9855 / 7222 = 1.36

Quick ratio = Liquid assets / Current liabilities

Liquid assets = Cash & cash equivalents + short term investment

Quick ratio: 1082 / 7222 = .15

Calculating for 2016

(a): Current Ratio = Current assets / current liabilities

Current ratio: 10204/6942 = 1.47

(b): Quick ratio = Liquid assets / Current liabilities

Liquid assets = Cash & cash equivalents + short term investment

Quick ratio: 1555 / 6942 = .22

Answer(2): Liquidity- Current ratio and quick ratio are the liquidity measures. We can see that in 2016, current and quick ratio have increased as compare to 2015, liquidity has increased in 2016 as compare to 2015.

Answer(3): Calculating inventory turnover ratio for 2015:

Inventory turnover ratio = Cost of goods sold / Average inventory

Average inventory = (Closing inventory + Opening inventory) / 2

Average inventory: (4322+4309) / 2 = $4315.50

Inventory turnover ratio: 32846/4315.50 = 7.61 times

Days sale in inventory = Ending inventory / COGS * 365

Days sale in inventory: 4322/32846 * 365 = 48 DAYS.

Calculating inventory turnover ratio for 2016:

Average inventory: (4371+4322)/2 = 4346.5

Inventory turnover ratio: 33213/4346.50 = 7.64 times

Days sale in inventory: 4371/33213 * 365 = 48 DAYS