Chapter 4, Problem 8C

1.

To determine

State the amount of the current assets and current liabilities at the end of 2017 and 2016.

Explanation of Solution

Current assets: The assets which could be converted into cash within one year like accounts receivables, or marketable investments; or which could be used up within the completion of an operating cycle, like inventory, supplies and insurance, are referred to as current assets.

Current liabilities: The obligations owed by a company to creditors and suppliers and are to be paid within a year are referred to as current liabilities.

Amount of current assets and liabilities at the end of 2017 and 2016:

Particulars	2017	2016
Current assets	€ 21,082	€ 19,398
Current Liabilities	€ 15,003	€ 12,810

Table (1)

Note: Amount of Euros in millions.

2.

To determine

Compute the current ratio at the end of the year 2017 and 2016 and explain whether the Company LVMH’s liquidity increase or decrease.

Explanation of Solution

 Current ratio: The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company.

Calculate the current ratio for the year 2017:

$\begin{array}{c}\text{Current}\text{ratio}\text{=}\frac{\text{Current}\text{assets}}{\text{Current}\text{liabilities}}\\ \text{=}\frac{€21,082}{€15,003}\\ \text{=}1.405\end{array}$

Calculate the current ratio for the year 2016:

$\begin{array}{c}\text{Current}\text{ratio}\text{=}\frac{\text{Current}\text{assets}}{\text{Current}\text{liabilities}}\\ \text{=}\frac{€19,398}{€12,810}\\ \text{=}1.514\end{array}$

The current ratio for the year 2017 is 1.405 and for the year 2016 is 1.514. The liquidity of Company LVMH decreased during the year 2017.

Note: Amount of Euros in millions.

3.

To determine

Mention the single largest current asset and current liability.

Explanation of Solution

• At the end of 2017, “inventories and work in progress” (€ 10,908 million). is the largest current asset
• At the end of 2017, “other current liability (€4,766 million),” is the largest current liability; even though trade accounts payable (€4,540 million) and short-term borrowings (€4,530 million) are equally large.

4.

To determine

State the short and long term debt borrowed by Company LVMH end of 2017 and explain whether these borrowings increase or decrease in 2017.

Explanation of Solution

• Company LVMH is having short term borrowings of “€4,530 million” and long-term borrowings of “€7,046 million”.
• Short-term borrowings increased by “+€1,083 million” and long-term borrowings increased by “+€3,114 million” during the year 2017.

5.

To determine

State the amount of total amount of liabilities at the end of 2017 and 2016.

Explanation of Solution

The amount of total liabilities is “€31,719 million” at the end of 2016 and “€38,290 million” at the end of 2017.

6.

To determine

State the total amount of equity at the end of 2017 and 2016.

Explanation of Solution

The amount of total equity was “€27,903 million” at the end of 2016 and was “€30,260 million” at the end of 2017.

7.

To determine

Compute the debt-to-equity ratio at the end of 2017 and 2016 and explain the manner in which the Company LVMH leverage change in 2017.

Explanation of Solution

Debt to equity ratio:

The ratio of company’s total debt to the total stockholders’ equity is known as debt to equity ratio. The company is at risk if the debt to equity ratio is high because, the company’s equity is not enough to repay the debt at maturity along with the interest.

Calculate debt to equity ratio for the year 2017:

$\begin{array}{c}\text{Debt-Equity ratio}\text{=}\frac{\text{Total liabilites}}{\text{Total}\text{Stockholders' equity}}\\ \text{=}\frac{\text{€38,290}\text{million}}{\text{€30,260}\text{million}}\\ \text{=}\text{1}\text{.265:1}\end{array}$

Calculate debt to equity ratio for the year 2016:

$\begin{array}{c}\text{Debt-Equity ratio}\text{=}\frac{\text{Total liabilites}}{\text{Total}\text{Stockholders' equity}}\\ \text{=}\frac{\text{€31,719}\text{million}}{\text{€27,903}\text{million}}\\ \text{=}\text{1}\text{.137:1}\end{array}$

The debt-to-equity ratio for the year 2017 is 1.265 and for the year 2016 is 1.137, which means that leverage increased to some extent during the year 2017.

Note: Amount of Euros in millions.

8.

To determine

State the inventory turnover rate for the year 2017, calculate the average number of days for inventory turnover in 2017 and explain whether the number of days in turnover for company LVMH seems long or short, if so provide the aspects of Company LVMH’s business strategy that explains the length of tine taken to turn over inventory.

Explanation of Solution

Inventory turnover ratio:

Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. The formula to calculate the inventory turnover ratio is as follows:

$\text{Inventory turnover}=\frac{\text{Cost of goods sold}}{\text{Average inventory}}$

Days’ sales in inventory:

Days’ sales in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them. The formula to calculate the days’ sales in inventory ratio is as follows:

The inventory turnover ratio for Company LVMH is calculated as follows:

$\begin{array}{c}\text{Inventory turnover}\text{=}\frac{\text{Cost of goods sold}}{\text{Average inventory}}\\ \text{=}\frac{\text{€14,783}}{\text{€10,727}\text{(1)}}\\ \text{=1}\text{.378}\text{times}\end{array}$

The average days to sell inventory for Company LVMH are calculated as follows:

$\begin{array}{c}\text{Average days' to sell inventory}\text{=}\frac{\text{Days in accounting period}}{\text{Inventory turnover}\text{ratio}}\\ \text{=}\frac{\text{365}\text{days}}{1.378\text{times}}\\ \text{=264}\text{.9}\text{days}\end{array}$

Therefore the inventory turnover ratio for Company LVMH is 1.378 times and average days to sell inventory for are 264.9days.

• The number of days for inventory turnover for Company LVMH is comparatively long (over 250 days). Because LVMH’s business strategy focuses on sales of luxury brand name items, as well as certain items (wine and spirits) that involve some aging, it is not surprising that it takes a relatively long time to turn over inventory.
• The company LVMH’s business strategy concentrate on sales of luxury brand name items, along with certain items such as wine and spirits which involves some aging and it takes a long time to turn over inventory.

Note: Amount of Euros in millions.

Working note:

(1) Calculate the average inventory:

$\begin{array}{c}\text{Average}\text{inventory}\text{=}\frac{\text{Ending}\text{inventory+Beginning}\text{inventory}}{\text{2}}\\ \text{=}\frac{\text{€10,908+€10,546}}{\text{2}}\\ \text{=€10,727}\end{array}$

9.

To determine

Explain whether the Company LVMH’s noncurrent assets at the end of 2017 is tangible, intangible, or financial in nature.

Explanation of Solution

• Company LVMH’s noncurrent assets are “primarily intangible” at the end of 2017.
• “Brands and other intangible assets (net), plus goodwill (net) amounts to €30,228 million, whereas tangible assets (property, plant, and equipment, net) amount to €13,206 million.
• Noncurrent financial assets that is “investments in joint ventures and associates plus available-for-sale financial assets” amount to €1,428 million.

10.

To determine

State the amount in investments in joint ventures and associates at the end of 2017.

Explanation of Solution

The amount of investments in joint ventures and associates amounted to “€639 million at the end of 2017”.

11.

To determine

State the amount of minority interest in equity at the end of 2017.

Explanation of Solution

“Minority interest in equity” amounted to €1,408 million at the end of 2017.

12.

To determine

State whether it is more likely that Company LVMH owns a minority of the equity or a majority of the equity, if Company LVMH has less than 100% ownership in another company, according to the answer given for requirement 9 to requirement 10.

Explanation of Solution

• Company LVMH will own a majority of equity if it has less than 100% ownership in another company.
• Minority interests in subsidiaries in which LVMH owns a majority are larger than the amounts of LVMH’s investments in associates for which it is the minority investor.