Description
Purpose of Assignment
The purpose of this assignment is to help students gain a better understanding of the financial statements used for corporate financial reporting and the key ratios used to make business decisions.
Assignment Steps
Select a Fortune 500 Company from one of the following industries:
- Pharmaceutical
- Energy
- Retail
- Automotive
- Computer Hardware
Review the balance sheet and income statement in the company's 2015 Annual Report.
Calculate the following ratios using Microsoft® Excel®:
- Current Ratio
- Quick Ratio
- Debt Equity Ratio
- Inventory Turnover Ratio
- Receivables Turnover Ratio
- Total Assets Turnover Ratio
- Profit Margin (Net Margin) Ratio
- Return on Assets Ratio
Analyze in 1,050 words why each ratio is important for financial decision making.
Must cite your sources
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Explanation & Answer
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Running Head: FINACIAL RATIO ANALYSIS
Financial Ratio Analysis
Name:
Institutional affiliation
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FINACIAL RATIO ANALYSIS
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Financial Ratio Analysis
Importance of Each Ratio to Financial Decision Making
Current Ratio
The current ratio is a measure of the company’s assets against its current liabilities. The
ratio is an indicator of the ability of the organization to settle short term debts through the sale of
its current assets. When the current rate is low, it means that the company cannot pay its
liabilities in short-term. When the ratio is high is shows that the firm has strong liquidity and a
lesser opportunity of a cash squeeze. Determination of the ratio is essential in decision making as
it may indicate that the company is holding so much cash in the form of inventory or it is holding
fewer stocks. The management can use the ratio to determine whether the business can meet its
short-term cash obligations while still managing the right level of inventory that it should hold
Quick Ratio
The quick ratio is a measure of comparison of the firm’s short-term securities that are
marketable and the debtors to the current liabilities of the enterprise. The idea behind quick ratio
is particular items like prepaid expenses have already been settled for the future purposes, and
such funds cannot be converted into cash. The rate is also referred to as an acid test, and it is
essential in determining whether the firm call meets its short-term obligations. When the quick
ratio is low, it means that the business has more cash in hand or the company has reduced debt
collection program in case it is low. The rate is necessary for making financial decisions to
advise on adoption of new debt collection techniques and also make decisions to decide on other
investments through which the organization can depend on to meet its obligations rather than
inventory (Lan, 2012)
FINACIAL RATIO ANALYSIS
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Debt Equity Ratio
The debt-equity ratio is a measure of the level of debt capital that a company utilizes
compared to the equity capital that it employs. It is the mix of the organizations investor-supplied
capital. The organization is in a better place in case the debt to equity ratio is low. A high debt to
equity ratio indicates that the creditors of the company are the primary beneficiaries of all the
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