Fnt Memorandum

Topics: Generally Accepted Accounting Principles, Balance sheet, Financial ratios Pages: 4 (1236 words) Published: April 2, 2013
To: Company G CEO
Date: February 20, 2013
Re: Comparing Company G against industry average

The first ratio calculated was current ratio. This is done by dividing current liabilities by current assets. Current ratio is important because it shows the business’s ability to pay back the current liabilities with the current assets that they have available to them. At the end of 2011, the current ratio was at 1.86. In 2012, this ratio dropped to 1.80. The industry ranges from 3.1 (showing a strong ability to pay back liabilities) to 1.4 (showing a weak ability to pay back liabilities) with a median of 2.1. Company G is below the median showing a weakness in this category.

Next we calculated acid test ratio. This is computed by available cash plus accounts receivable plus short-term investments divided by current liabilities. This calculation will show us if the business could pay all of their current liabilities if they all came due at once. In 2011, the acid test ratio was 0.64. At the end of 2012, it dropped to 0.44. This is showing a major weakness due to the fact that the industry averages from 1.6 (strong) to 0.6 (weak). Company G is well below industry averages.

Inventory turnover was the next ratio calculated. This is done by calculating the cost of goods divided by average inventory. This calculation is basically measuring the amount of times a business sells its products (inventory) in a given year. A low rate of turnover will show difficulty in selling their inventory with a high rate of turnover showing ease in selling their inventory. In 2011, the inventory turnover ratio was 6.1. This ratio dropped to 5.2 in 2012. This is a major weakness with industry averages ranging from 13 to 8.3 This could be due to the high price of the cost of goods being sold.

The next ratio calculated was accounts receivable turnover. This ratio is measuring the ability of the company to collect cash from their credit customers. It is accomplished by dividing net...
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