To: CFO Superior Living
From: Miranda Bergen, VP of Finance
Date: October 17, 2011
Subject: Financial Analysis of Balance Sheet
Good afternoon, I would like to thank you for taking the time to review my analysis of our balance sheet. As the vice president of finance it is my responsibility to analyze all financial documents and to maintain a close eye on our finances. I have been asked to analyze the balance sheet and explain my findings concerning the working capital, current ration, and the short- and long-term debts. A balance sheet analysis is focused mainly on determining whether our company is financially stable and strong and economically efficient (Kennon, n.d.). Working Capital
My first task is to explain our working capital. Our working capital is a figure that is calculated in order to determine how much of our liquid assets will be available for our day-to-day use towards expenses (expected and unexpected), short-term debt, to help build the business, and for capital projects (Wolfe, n.d.). The calculation that will be utilized to determine our working capital, one must use that accounting formula: Current Assets – Current Liabilities = Working Capital
(CTU Online, 2011).
This chart tells us that the working capital in 2001 was $39,500,000, 2002 it was $42,100,000, and in 2003 it was $41,950,000. This means that Superior Living, Inc. (SLI) has $42 billion in working capital. Looking at SLI’s working capital for these three years it is clear that our company was completely capable of paying off our current liabilities. Our company having a positive working capital portrays that we are financially healthy and stable, had any of the results been negative then our company would not be capable of meeting the short-term debt/current liabilities obligation (Kennon, n.d.). Current Ratio
My second task was to calculate the current ratio (CR) for SLI. The current ratio is utilized by financial institutions that may be in the position of offering credit or loans to SLI. The CR is calculated to determine whether our company will be capable of paying off our obligations when they come due. The balance sheet is the major financial statement utilized to determine what the CR is (Ford, 2010). The following equation will reflect what the CR is: Current Assets/Current Liabilities = Current Ratio
(CTU Online, 2011).
The “good” CR should be at least 1.5 and not more than 3 or 4. The CR will vary from industry to industry and business to business (Ford, 2010). Ford (2010) stated that it is harder to obtain short-term financing if the CR is below 2. Banks are very reluctant to provide funds to companies with a cash flow problem because banks do not like to “force the liquidation of a company” (Ford, 2010). It is also not good to have a CR that is too high, according to Kennon (2010) because this is a sign that our management is not adequately using our cash. The results in the chart above displays that our company has had a “good” CR” for each of these three years, having a CR of 2.2 in 2001, a 2.1 in 2002, and a 2 in 2003. According to our CR ratio, our company is in good standing to obtain short-term financing. This short-term financing is what our company uses to fund our “day-to-day expenses” so maintaining a “good” CR is very important for SLI. Short-Term Debt
Our short-term debts, also known as current liabilities, are the debts that our company has accumulated that are expected to be paid off within a year. The short-term debts of our company are listed as our current portion of long-term debt, accounts payable, and...
References: Portions of this paper was repurposed from a previous class assignment: ACCT614-1003B-02- P1-T3 and FINC615-1104A-03-P1-T4-DB
CTU Online. (2011). Applied Managerial Finance. Phase 1 Task 5 course materials [Superior’s Balance Sheet]. Retrieved from https://campus.ctuonline.edu/pages/MainFrame.aspx?ContentFrame=/Home/Pages/Defau lt.aspx.
Ford, N. (2010). Understanding a current ratio analysis. Retrieved from http://www.helium.com/items/1776899-current-ratio-analysis.
Kennon, J. (n.d.). Putting it all together: Investing lesson 3-analyzing a balance sheet. Retrieved on October 12, 2011 from http://beginnersinvest.about.com/od/analyzingabalancesheet/a/putting-together-balance- sheet.htm.
Kennon, J. (n.d.). Working capital: Investing lesson 3-analyzing a balance sheet. Retrieved on October 12, 2011 from http://beginnersinvest.about.com/od/analyzingabalancesheet/a/working-capital.htm.
Kennon, J. (n.d.). Long-term debt and the debt equity ratio on the balance sheet: Investing lesson 3-analyzing a balance sheet. Retrieved on October 12, 2011 from http://beginnersinvest.about.com/od/analyzingabalancesheet/a/long-term-debt-to-equity- ratio.htm.
Marshall, D. (n.d.). Balance sheet accounts. Retrieved on October 12, 2011 from http://www.dwmbeancounter.com/tutorial/coabal.html.
Wolfe, L. (n.d.). Definition of working capital. Retrieved on October 11, 2011 from http://womeninbusiness.about.com/od/glossaryofbusinessterms/a/def-workingcap.htm.
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