a. Why are ratios useful? What are the five major categories of ratios?

Ratios are useful to evaluate a firm’s financial statements and one can also compare their performance with other firms, or the industry average.

The five major categories for ratios are as follow: i. Liquidity Ratios: measures the liquidity of the firm’s current assets to their current liabilities (or obligations to creditors). ii. Asset Management Ratios: measures how effectively the firm is handling and managing their assets. iii. Debt Management Ratios: measure their debt financing, or financial leverage; how much is the firm depended on debt. iv. Profitability Ratios: these ratios demonstrate the effects of liquidity, asset management, and debt combined together on operating results. v. Market Value Ratios: these are ratios that help managers know what investors think of the company’s past performance and future prospects.

b. Calculate the 2007 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2005, 2006, and as projected for 2007? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios?

Current Ratio = Current Assets / Current Liabilities Current Ratio = $2,680,112 / $1,039,800 Current Ratio = 2.58 times

Quick Asset Ratio = (Current Assets – Inventory) / Current Liabilities Quick Asset Ratio = ($2,680,112 - $1,716,480) / $1,039,800 Quick Asset Ratio = 0.93 times

The firm is has improved