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Acc 291 Week 5 Ratio Analysis Memo

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Ratio Analysis Memo
ACC/291: Principles of Accounting II
University of Phoenix
MEMORANDUM
TO: Dr. Riordan, Founder and All Employees
FROM: Team A
DATE: August 15, 2011
SUBJECT: Ratio Analysis

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CC: Board of Directors
Team A has completed a ratio analysis for Riordan Manufacturing. The team
analyzed liquidity ratios, profitability ratios, and solvency ratios. The team also did a
horizontal and vertical analysis for company’s balance sheet and the income
statement.
Liquidity ratios are the temporary capabilities of a business to compensate for its
established requirements and unanticipated needs for cash. Suppliers and bankers
are the short-term creditors who are mostly interested in liquidity ratios. The acid-test
ratio, current ratio, inventory ratio, and receivables turnover are the ratios used to
establish the company’s short-term capability. To determine the current ratio, divide
the current assets by the current liabilities (Weygandt, Kimmel, & Kieso, 2011).
Liquidity ratios reveal whether or not the company is capable of paying their debts.
Riordan’s 2.09 ratios signify that for each dollar of current liabilities, Riordan has
$2.09 of current assets. The current ratio of Riordan has declined slightly since 2004.
Current ratio
2005 2004
$14,555,092 $14,643,456
$6,974,094 = 2.09 $6,029,696 = 2.43
The acid-test ratio is an evaluation of a business’s direct short-term liquidity.
To determine the acid ratio, divide cash, net receivables, and short-term investments
by current liabilities (Weygandt, Kimmel, & Kieso, 2011). Riordan’s ratio has declined
in 2005.
Acid-test ratio
2005 2004
$305,563 + $283,504 + $6,062,838 = 0.95 $357,216 + $133,504 +
$5,657,216 = 1.02
$6,974,094 $6,029,696

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The receivables turnover is a calculation of the liquidity of receivables that computes
the average number of times the business accumulates receivables throughout the
period. To determine receivables turnover, divide the net credit sales by the average
net receivables (Weygandt, Kimmel, & Kieso, 2011).
Riordan’s receivables turnover improved in 2005. The turnover of 4.1 times is larger
than the 1.4 times in 2004.
Receivables turnover
2005 2004
$50,823,685 = 16.6 times $46,044,288 = 15.9 times
[$6,062,838 + $70,825] [$5,657,216 + $117,888]
[ 2 ] [ 2 ]
The inventory turnover computes the average amount of times the inventory is sold
throughout the period. The inventory turnover computes the liquidity of the inventory.
To determine inventory turnover, divide the cost of goods sold by the average
inventory (Weygandt, Kimmel, & Kieso, 2011).
Riordan’s inventory turnover improved in 2005. Riordan’s quick inventory turnover
has decreased the company’s chance
of inventory loss.
Inventory turnover
2005 2004
$42,037,624 $37,480,050 = 4.8 times
$7,850,970 = 5.4 times $7,854,112
Profitability Ratios measure the income or operating success of a company for a
period of time. Profitability is very important to investors and creditors because they
can evaluate the earning power of the organization. Profitability ratios reveal whether
or not a company is able to generate revenue.
Asset Turnover:

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