ACC/291: Principles of Accounting II

University of Phoenix

MEMORANDUM

TO: Dr. Riordan, Founder and All Employees

FROM: Team A

DATE: August 15, 2011

SUBJECT: Ratio Analysis

CC: Board of Directors

Team A has completed a ratio analysis for Riordan Manufacturing. The team analyzed liquidity ratios, profitability ratios, and solvency ratios. The team also did a horizontal and vertical analysis for company’s balance sheet and the income statement.

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 company’s short-term capability. To determine the current ratio, divide the current assets by the current liabilities (Weygandt, Kimmel, & Kieso, 2011). Liquidity ratios reveal whether or not the company is capable of paying their debts.

Riordan’s 2.09 ratios signify that for each dollar of current liabilities, Riordan has $2.09 of current assets. The current ratio of Riordan has declined slightly since 2004. Current ratio

20052004

$14,555,092$14,643,456

$6,974,094 = 2.09$6,029,696= 2.43

The acid-test ratio is an evaluation of a business’s direct short-term liquidity. To determine the acid ratio, divide cash, net receivables, and short-term investments by current liabilities (Weygandt, Kimmel, & Kieso, 2011). Riordan’s ratio has declined in 2005. Acid-test ratio

2005 2004 $305,563 + $283,504 + $6,062,838 = 0.95 $357,216 + $133,504 + $5,657,216 = 1.02 $6,974,094 $6,029,696

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, 2011). Riordan’s receivables turnover improved in 2005. The turnover of 4.1 times is larger than the 1.4 times in 2004. Receivables turnover

20052004

$50,823,685 = 16.6 times $46,044,288 = 15.9 times [$6,062,838 + $70,825][$5,657,216 + $117,888]

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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, 2011). Riordan’s inventory turnover improved in 2005. Riordan’s quick inventory turnover has decreased the company’s chance of inventory loss. Inventory turnover

20052004

$42,037,624 $37,480,050 = 4.8 times

$7,850,970 = 5.4 times$7,854,112

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:

50,823,685 50,823,685

34,592,182+33,856,25634,224,219 = 1.49 times

2

In 2005, Riordan Manufacturing generates sales of 1.49 times for each dollar it had invested in assets.

Profit Margin:

20052004

1,956,3711,990,495

50,823,685 = 3.85%46,044,288 = 4.32%

Riordan Manufacturing, Inc experienced a decrease in its profit margin in 2005 with 3.85% compared with the 4.32% in 2004. Return on Assets:

1,956,371

34,224,219 = 5.71%

Riordan Manufacturing Inc. presents a 5.71% in his...