Part 2 TKM0844 11E IM Ch18
Chapter 18
Working Capital Management
18-1.
As was done in Checkpoint 18.1 in the text, we can evaluate Deere & Co.’s liquidity using net working capital and the current ratio. Net working capital is simply the difference between current assets and current liabilities, while the current ratio can be found as (using 2008 as an example):
current assets current ratio =
current liabilities
$9,197,400
=
= 0.61.
$15,083,300
Since Deere’s current ratio is less than 1, its current assets are less than its current liabilities; this, then, implies that its net working capital is negative.
Here are the values for Deere for 2006–2008:
A
2006
2007
2008
B
CA
$7,152,900
$9,920,100
$9,197,400
C=A-B
CL net working capital
$12,787,500
($5,634,600)
$15,921,500
($6,001,400)
$15,083,300
($5,885,900)
D = A/B current ratio
0.559
0.623
0.610
All of Deere’s net working capital values for this period are negative. While the magnitude of
2008’s is smaller than 2007’s, it is still higher than 2006’s initial value. Looking at Deere’s accounts for 2007 and 2008, we see that Deere’s cash fell very slightly, but its short-term investments completely disappeared (Deere didn’t have any of these in 2006, either). Net receivables rose; inventory rose significantly. These last two accounts were extremely influential on the company’s liquidity position. Deere might want to tighten up its credit policy (to reduce accounts receivable) and investigate its inventory position.
There are some issues on the current liability side, too. Deere’s accounts payable doubled in 2008, its short-term debt fell slightly, and its other current liabilities disappeared. Deere’s A/P increase undoubtedly helped fund its increases in inventory and A/R. However, ominously, the dollar increase in A/P is much larger than the increases in these two CA accounts.
Overall, Deere’s liquidity position is fairly consistent: Net working capital is negative throughout the period, with the current ratio
Working Capital Management
18-1.
As was done in Checkpoint 18.1 in the text, we can evaluate Deere & Co.’s liquidity using net working capital and the current ratio. Net working capital is simply the difference between current assets and current liabilities, while the current ratio can be found as (using 2008 as an example):
current assets current ratio =
current liabilities
$9,197,400
=
= 0.61.
$15,083,300
Since Deere’s current ratio is less than 1, its current assets are less than its current liabilities; this, then, implies that its net working capital is negative.
Here are the values for Deere for 2006–2008:
A
2006
2007
2008
B
CA
$7,152,900
$9,920,100
$9,197,400
C=A-B
CL net working capital
$12,787,500
($5,634,600)
$15,921,500
($6,001,400)
$15,083,300
($5,885,900)
D = A/B current ratio
0.559
0.623
0.610
All of Deere’s net working capital values for this period are negative. While the magnitude of
2008’s is smaller than 2007’s, it is still higher than 2006’s initial value. Looking at Deere’s accounts for 2007 and 2008, we see that Deere’s cash fell very slightly, but its short-term investments completely disappeared (Deere didn’t have any of these in 2006, either). Net receivables rose; inventory rose significantly. These last two accounts were extremely influential on the company’s liquidity position. Deere might want to tighten up its credit policy (to reduce accounts receivable) and investigate its inventory position.
There are some issues on the current liability side, too. Deere’s accounts payable doubled in 2008, its short-term debt fell slightly, and its other current liabilities disappeared. Deere’s A/P increase undoubtedly helped fund its increases in inventory and A/R. However, ominously, the dollar increase in A/P is much larger than the increases in these two CA accounts.
Overall, Deere’s liquidity position is fairly consistent: Net working capital is negative throughout the period, with the current ratio