Question

18-2. (Related to Checkpoint 18.1 on page 573) (Measuring firm liquidity) The following table contains current asset and current liability balances for Microsoft Corporation (MSFT) 2008 2007 2006 Cash and cash equivalents 6,714,000 10,339,000 6,111,000 Short-term investments 13,323,000 17.300,000 27,447,000 Net receivables 15,606,000 13,237,000 11,256,000 Inventory 985,000 I,127,000 1,478,000 2.393,000 40,168,000 Other current assets 2.989,000 43,242,000 2.115.000 49,010,000 Total current assets Accounts payable Short-tem/current long-term debt 12,830,000 6,612,000 9,521,000 2,741,000 Other current liabilities 17,056,000 29,886,000 12.921,000 22.442,000 14.401,000 23,754,000 Total current liabilities a. Assume that you are the lead banker for the syndicate of banks that manages Microsoft Corporation's line of credit. Your boss has asked that you report to him on the current state of Microsoft's liquidity. How would you describe the liquidity of Microsoft in 2008? b. Have there been recent changes in Microsoft's liquidity? If so, have the changes been to improve the firm's liquidity? Explain your observations.

Answer 1

Solution:

In order to find the liquidity of Microsoft, we can find few ratio.

Current ratio is one of the major ratio that gives the idea about the liquidity.

Current ratio = current asset / current liability

Current ratio

Part A)

2006: Current ratio = 49,010,000/22,442,000 = 2.18

2007: current ratio = 40,168,000/23,754,000 = 1.69

2008 current ratio = 43,242,000/29,886,000 = 1.45

We can see that current ratio is more than one that means the firm has more assets than liability and we can say that the liquidity is good

Part B ) Yes there has been change in liquidity and it has decreased from 2.18 to 1.45. This change means that the liquidity of the firm has been deteriorated.