Chapter 9, Case Problem 3CP9-3, LO2-3, p. 511

Group 6Chelsea Underhill

Erick ValenciaKartik Patel

Steven Tuazon

1) Compute the current ratio for each company for fiscal 2005 and 2004.

PacSun: – 352,818 / 95,310 = 3.701 (2005)– 353,537 / 110,539 = 3.198 (2004)

AE:– 827,640 / 253,265 = 3.27 (2005)– 530,700 / 208,979 = 2.539 (2004)

2) Compare the most recent current ratio for each company to the industry average from the Industry ratio report. Based solely on the

current ratio, are these companies more or less liquid than the average company in their industry.

Industry Ratio Report :– 2.32– PacSun: 3.701– AE: 3.26

• Both companies are more liquid than the average company in their industry.

3) Compute the payable turnover ratio for each company for the most recent reporting year.

What is the amount of long-term liabilities at the end of the most recent reporting year?

• Payable Turnover Ratio = cost of goods sold / Average accounts payable

• PacSun = $781,828 / $38,710.5 = 20.20• AE = $1,003,433 / $73,837 = 13.59

• (in thousands)

Long-term Liabilities:

PacSun: $124,434

AE: $76,908

4) Compare the latest year payable turnover ratio for each company to the industry average. Are these companies doing better or worse than the average company in their industry at paying trade creditors?

Industry Average: 12.75• (Appendix D)

These companies are doing better than the average company in their industry.

5) Using this information and any other data from the annual report, write a brief assessment

of the liquidity for the two companies.

Using current ratio…– Current Ratio = Current assets / Current

liabilities

Current Ratio:

Pacific Sunwear:– $352,818 / 95,310 = 3.70

American Eagle:– $827,640 / 253,265 = 3.27

Industry Average:– 2.32

– ($$ in thousands)

Liquidity assesment:

The high ratio suggests good liquidity, but too high a ratio suggests inefficient use of resources.

The End