Hsm 260 Final

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Week Nine Final Project: Analyzing Financial Statements
HSM 260

Current Ratio
Table [ 1 ]
| | 2002| 2003| 2004|
Current Ratio| Current Assets| $104,296.00 | 0.75| $82,058.00 | 0.87| $302,902.00 | 0.43| | Current Liabilities| $139,017.00 | | $93,975.00 | | $699,004.00 | |

An organization’s current ratio shows how liquid the assets of the agency are by comparison to the short term debts that the agency must pay to continue its operations. This ratio is calculated by taking the assets that can be converted to cash within a year (current assets) and dividing it by the liabilities that are either currently due or will become due within a year (current liabilities). The current ratio, ideally, should be at 1.0 because, that would mean that the agency is fully able to cover its current operating expenses (Martin, 2001). In the case of the XYZ Non-Profit corporation, Table 1 (shown above) shows that the balance sheet calculations indicate that the current ratio went from 0.75 in 2002, to 0.87 in 2003, to 0.43 in 2004. This indicates an improvement in the ratio in 2003 but, a drastic decline in liquidity in 2004. The 0.43 liquidity ratio indicates the company only has 43% of the liquid assets that it actually needs to pay its current obligations. This would leave 57% of the agency’s current obligations that would be late, go into collections, or become unpaid debts. This can be trouble for the agency because it may not be able to stay in operation if it cannot cover current utility, supply, payroll, or other urgent expenses as they arise. Although the current ratio of the XYZ company is not as strong as it should be, this ratio can be interpreted in conjunction with the long-term solvency ratio (discussed in the next section) in order to get a clearer picture of the company’s ability to pay its debts. Long-Term Solvency Ratio

Table [ 2 ]
| | 2002| 2003| 2004|
Long-Term Solvency Ratio| Total Assets| $391,270.00 | 1.26| $359,863.00 | 1.38| $699,004.00 | 2.06| | Total Liabilities| $310,246.00 | | $259,979.00 | | $338,937.00 | |

Like the current ratio, the long-term solvency ratio tells the agency’s ability to pay debts. The difference between the two ratios is that while the current ratio looks at the agency’s ability to pay short-term obligations, the long-term solvency ratio shows the agency’s ability to pay the debts that are coming due on an annual basis. This ratio is calculated by taking the long-term and short-term assets of an organization and dividing them by the long-term and short-term liabilities of that organization. Another similarity that the long-term solvency ratio has with the current ratio is that it should be at 1.0 (Martin, 2001). If the ratio is at 1.0 then it has 100% of the assets it needs to cover its debts. XYZ Company’s long-term solvency ratios (shown in Table 2) for 2002-2004 show improvement year after year. The ratio went from 1.26 in 2002 to 1.38 in 2003 (a 0.12 improvement) and from 1.38 in 2003 to 2.06 in 2004 (a 0.68 improvement). The long-term solvency ratio of the organization should also be considered with the current ratio. The XYZ Non-Profit Corporation current ratio shows the agency is not as financially stable with its short-term liabilities and obligations. The strength of the financial status of the company in the long term solvency ratios shows that the agency has the availability of long-term assets and long-term investments. If the agency needed to it could potentially sell assets or convert long term investments to cash early, if need be, in order to meet current obligations. Contribution Ratio

Table [ 3 ]
| | 2002| 2003| 2004|
Contribution Ratio| Largest Revenue Source| $617,169.00 | 0.53| $632,889.00 | 0.51| $1,078,837.00 | 0.49| | Total Revenues| $1,165,065.00 | | $1,244,261.00 | | $2,191,243.00 | |

The contribution ratio is calculated by taking the agencies largest revenue...
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