Selected Risk Ratios Are Presented for 2011 and 2010 for Techtron

Essay

Selected risk ratios are presented for 2011 and 2010 for Techtron Company.Also,refer to the financial statement data for the company.
$\begin{array}{|l|r|r|}\hline&2011&2010\\\hline \text { Revenues to Cash Ratio } & 6.8 & 7.7 \\\hline \text { Days Revenues Held in Cash } & 54 & 47 \\\hline \text { Current Ratio } & 1.5 & 1.5 \\\hline \text { Quick Ratio } & 1.1 & 1.1 \\\hline\text { Operating Cash Flow to Average Current Liabilities } \\\text { Ratio } & 47.3 \% & 55.7 \%\\\hline \text { Days Accounts Receivable } & 68 & 73 \\\hline \text { Days Inventory } & 51 & 68 \\\hline \text { Days Accounts Payable } & 47 & 49 \\\hline \text { Net Days Working Capital } & 72 & 91 \\\hline \text { Liabilities to Assets Ratio } & 0.559 & 0.621 \\\hline \text { Liabilities to Shareholders' Equity Ratio } & 1.266 & 1.639 \\\hline \text { Long-Term Debt to Long-Term Capital Ratio } & 0.330 & 0.418 \\\hline \text { Long-Term Debt to Shareholders' Equity Ratio } & 0.492 & 0.720 \\\hline \text { Operating Cash Flow to Total Liabilities Ratio } & 0.243 & 0.242 \\\hline \text { Interest Coverage Ratio } & 5.6 & 2.3\\\hline \end{array}$
Financial Statements
$\text { INCOME STATEMENT (in millions) }$
$\begin{array}{l}\begin{array}{l}\text {Fiscal year end}\\\text {Sales}\\\text {Cost of Goods Sold}\\\text {Selling General \& Admin. Exp.}\\\text { Advertising } \\\text { Research and Development } \\\text { Royalty Expense } \\\text { Other Selling and Administrative } \\\text { Interest expense } \\\text { Income tax expense }\\\text { Net income }\end{array}\begin{array}{rr}2012&2011&2010\\\$ 2,500 & \$ 3,139 & \$ 2,816 \\\underline{(1,252)} & \underline{(1,288) }& \underline{(1,099)}\\\\(387) & (364) &(297)\\(157) & (143)&(154) \\(223) & (248)&(296) \\(385) & (799) &(788)\\(32) & (53) &(78)\\\underline{(64)} & \underline{(69)}&\underline{(29)}\\\underline{\underline{\$196}}&\underline{\underline{\$175}}&\underline{\underline{\$75}}\end{array}\end{array}$
\(\begin{array}{lrrrr}
\text { Balance Sheet }\\
\text { Fiscal year end }&2012&2011&2010&2009\\
\text { ASSETS (in millions) }\\
\text { Cash } & \$ 625 & \$ 421 & \$ 496 & \$ 233 \\
\text { Accounts Receivable } & 579 & 607 & 555 & 572 \\
\text { Inventories } & 195 & 169 & 190 & 217 \\
\text { Prepayments } & 219 & 212 & 191 & 346 \\
\text { Total current assets } & \$ 1,618 & \$ 1,409 & \$ 1,432 & \$ 1,368 \\
\text { Property, plant \& equipment } & 207 & 200 & 213 & 236 \\
\text { Other Assets } &\underline{ 1,416 }& \underline{1,554 }&\underline{ 1,498 }&\underline{ 1,765}\\
\text { Total assets }&\underline{\underline{\$ 3,241}} &\underline{\underline{\$ 3.163}} &\underline{\underline{\$ 3.143}}&\underline{\underline{\$3.369}}\\
\text { LIABILITIES }\\
\text { Accounts payable } & \$ 168 & \$ 159 & \$ 166 & \$ 123 \\
\text { Short-term borrowing } & 342 & 24 & 223 & 36 \\
\text { Other current liabilities } &\underline{ 584 }& \underline{749} & \underline{578} &\underline{ 599} \\
\text { Total current liablities }&\underline{\$ 1,094}&\underline{\$ 939}&\underline{\$ 967}&\underline{\$ 758}\\
\text { Long-term debt }&303 & 687 &857 & 1,166 \\
\text {Other noncurrent liabilities}&\underline{149} & \underline{141 }&\underline{128} &\underline{ 92}\\
\text { Total liabilities}&\$ \underline{1,546} &\$ \underline{1,767} &\$ \underline{1,952} &\$ \underline{2,016}\\
\\
\text {Common stock}&\$ 105 & \$ 105 & \$ 105 & \$ 105 \\
\text {Additional Paid-in Capital}&381 & 398 & 458 & 455 \\
\text {Retained earnings}&1,776 & 1,558 & 1,430 & 1,622 \\
\text {Accumulated Other Comprehensive Income }&82 & 30 & (47) & (68) \\
\text {Treasury Stock}&\underline{(649) }& \underline{(695)} &\underline{ (755) }& \underline{(761)}\\
\text {Total Shareholders' equity}&\underline{\$ 1,695}&\underline{\$ 1,396}&\underline{\$ 1,191}&\underline{\$ 1,353}\\
\text { Total Liabilities \& Shareholders' Equity }&\underline{\underline{\$ 3,241}}&\underline{\underline{\$ 3,163}}&\underline{\underline{\$ 3,143}}&\underline{\underline{\$ 3,369\}}\
\end{array}\)
\(\text { STATEMENT OF CASH FLOWS (in millions) }\)

\(\begin{array}{lccc}
\text { Operations } & \mathbf{2 0 1 2} & \mathbf{2 0 1 1} & \mathbf{2 0 1 0} \\
\text { Net Income } & \$ 196 & \$ 175 & \$ 75 \\
\text { Depreciation \& Amortization } & \underline{146} & \underline{164} &\underline{ 184}\\
\text { (Increase) Decrease Accounts Receivables } & 28 &(52)&17\\
\text { (Increase) Decrease Inventories } & (26) &21&27\\
\text { (Increase) Decrease Prepayments } & 7&(21)&155\\
\text { (Decrease) Increase Accounts Payable \& Other }\\
\text {Current Liabilities}&\underline{(90)}&\underline{17}&\underline{23}\\
\text {Net Addbacks and Subtractions from }&\underline{(147)}&\underline{112}&\underline{221}\\
\text {operations Cash flows from operations }&\underline{\$ 195}&\underline{\$451}&\underline{\$480}\\
\text {Investing}\\
\text {Property Plant and Equipment acquired}& (\$ 79) & (\$ 63) &(\$ 59) \\
\text {Other Investing Transactions}&\underline{(6)}&\underline{(2)}&\underline{(3)}\\
\text { Cash Flows from Investing}& \underline{(\$ 85)} &\underline{(\$ 65)} &\underline{(\$ 62)}\\
\text { Financing }\\
\text { Increase in Common Stock } &0 & 0 & 0 \\
\text { Increase (Decrease) in Short-term Borrowing } & (318) & 199 & (187) \\
\text { Increase (Decrease) in Long-term Borrowing } &(384) & (170) & 309 \\
\text { Acquisition of Common Stock } &(46) & 60 & (6) \\
\text { Dividends } &(37) & (21) & (21) \\
\text { Other Financing Transactions } &\underline{879} & \underline{243} & \underline{(250)}\\
\text { Cash flow from Financing }&\underline{\$ 94}&\underline{ (\$ 311)}& \underline{(\$ 155)}\\
\text { Change in Cash } & \$ 204 & \$ 75 & \$ 263 \\
\text { Cash - Beginning of Year } &\underline{ 421} &\underline{ 496} &\underline{ 233}\\
\text { Cash - End of Year }&\underline{\underline{\$ 625}}&\underline{\underline{\$ 421}}&\underline{\underline{\$496}}
\end{array}\)
Required:
a.Calculate the amounts of these ratios for 2012.
b.Assess the changes in the short-term liquidity risk of Techtron between 2010 and
2012 and the level of that risk at the end of 2012.
c.Assess the changes in the long-term solvency risk of Techtron between 2010 and
2012 and the level of that risk at the end of 2012.