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Ratio Analysis Memo

ACC 291: Principles of Accounting II




Liquidity Ratios are the temporary capabilities of a business to compensate
for its established requirements and unanticipated needs for cash. Suppliers and
bankers are the short-term creditors who are mostly interested in liquidity ratios. The
acid-test ratio, current ratio, inventory ratio, and receivables turnover are the ratios
used to establish the companys short-term capability. To determine the current ratio,
divide the current assets by the current liabilities (Weygandt, Kimmel, & Kieso,
2010). Liquidity ratios reveal whether or not the company is capable of paying their
debts.
Current ratio (current assets / current liabilities)
2011
$17,377,957 / $3,685,152 = 4.71:1
2010
$14,524,790 / 2,750,057 = 5.28:1

The acid-test ratio is an evaluation of a businesss direct short-term liquidity.
To determine the acid ratio, divide cash, net receivables, and short-term investments
by current liabilities (Weygandt, Kimmel, & Kieso, 2010).

Acid-test ratio (cash + Short term Investments + Receivables (Net) / Current Liabilities)
2011
$3,725,406 + $1,734,004 + $3,276,349 / $3,685,152= 2.37:1
2010
$2,807,029 + $1,609,004 + $2,798,318 / $2,750,057=2.62:1


The receivables turnover is a calculation of the liquidity of receivables that
computes the average number of times the business accumulates receivables
throughout the period. To determine receivables turnover, divide the net credit sales
by the average net receivables (Weygandt, Kimmel, & Kieso, 2010).

Receivables turnover (Net credit sales / Average Net Receivables)

$66,608,660 / $3,276,349 + $2,798,318 / 2
$66,608,660 / $3,037,333
21.92


The inventory turnover computes the average amount of times the inventory
is sold throughout the period. The inventory turnover computes the liquidity of the
inventory. To determine inventory turnover, divide the cost of goods sold by the
average inventory (Weygandt, Kimmel, & Kieso, 2010).

Inventory turnover (Cost of goods/ Average inventory)
2011
$51,592,470 / $9,709,611 + $8,517,203 / 2
$51,592,470 / $9,113,407
5.66

Profitability Ratios measure the income or operating success of a company for
a period of time. Profitability is very important to investors and creditors because
they can evaluate the earning power of the organization. Profitability ratios reveal
whether or not a company is able to generate revenue.







Asset Turnover: (Sales or revenue / total assets)
2011
$66,608,660 / $47,409,137
1.40

2010
$56,534,254 / $414,524,790
3.89


Profit Margin: (gross profit / total revenue)
2011
$3,310,662 / $66,608,660
4.97%

2010
$2,430,872 / $56,534,254
4.30%


Return on Assets: (Annual net income/ average total assets)

$3,310,662 / ($47,409,134 + $34,825,498 / 2)
$3,310,662 / $41,117,317.5
8.05%


Return on Common Stockholders equity:
(Net income / average shareholder equity)

$3,310,662 / $33,447,982 + $29,946,992 / 2
$3,310,662 / $31,697,487
10.44%


Solvency ratios: The solvency ratios debt to total assets ratio and times
interest earned tells creditors if a company will be able to pay maturing debt and
interest. Total liabilities divided by total assets is the debt to total assets ratio.
Creditors will determine if a company can pay the maturing debt by the lower the
percentage of the debt to total assets ratio the more likely it will be able to pay its
debts. The times interest earned is income before income taxes and interest
expense divided by interest expense. The result of this ratio will tell creditors and
investors the companys ability to pay interest as it comes due. The higher the result
of times interest earned the easier it is for the company to pay their interest.



Debt to total assets ratio= (total liabilities/ total assets )
2011
13961155/47409137
29.45%

2010
4878506/34825498
14.00%



Times interest earned
(Income before income taxes and interest expense/interest expense)
2011
5019587/1708925
2.94

2010
3272314/841442
3.89