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# ACC 291 Week 5 Learning Team Assignment Ratio Analysis Memo fin571

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ACC 291 Week 5 Learning Team Assignment Ratio Analysis Memo
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Date Created: 11/10/15
RATIO ANALYSIS MEMO Ratio Analysis Memo – Kudler Fine Foods ACC/291 University of Phoenix September 18, 2011 To: Ms. Kathy Kudler, CEO From: Accounting Re: Company Ration Analysis Kudler Fine Foods accounting  department has completed a full analysis on the 2003 financial   statistics.   Different   tools   of   analysis   are   used   to   help   complete   the   analysis measurement. Below you will find exact calculations on liquidity ratios, profitability ratios, and RATIO ANALYSIS MEMO solvency ratios. Financials from 2003 have helped us get an overall view of the company’s well being and with further years to come we will be better able to estimate a yearly return. To measure the company’s short­term ability to pay its maturing obligations and to meet  unexpected needs for cash, or liquidity ratio, several ratios are used. First is the current ratio rate. This measures the company’s liquidity and short­term debt­paying ability. Kudler’s current ratio  is 16.95:1. This means the company has \$16.95 of current asset for every dollar of current  liability. This is great in comparison to the average industry’s ratio, which is 1:06:1. Kudler’s  acid­test ratio, which measure immediate liquidity, is 13:04:1. The average industry’s is 0.29:1.   The receivable turn­over rate is 125.54. In other words, Kudler Fine Foods collects 125  receivables during its given period. This rate is over four times the industry average of 28.2.  After measuring the inventory turnover, Kudler Fine foods inventory is sold 18.9 times during its accounting period. With the average industry rate being 7.0, its obvious to see the company is  doing well. Profitability ratios measure the income or operating success of a company for a given period of time. To help determine profitability ratios, Kudler’s accounting department  measured the company’s assets turnovers, profit margins, return on assets, and return on  common Stockholder’s Equity. To begin, all ratio rates in their given field are higher than the  industry’s average ratio rate. The asset turnover shows Kudler generate \$4.04 of sales for each  dollar the company invested in assets. The percentage of each dollar of sales that resulted in net  income, or profit margin amount, is 6.7%. A return of asset rate of 25.3% shows the overall  measure of profitability. This was determined by measured dividing net income by average  assets. This rate is more than three times the industry’s average rate. The return on common  Stockholder’s Equity has a high rate of 0.90%. This means the company earns \$90 for each  dollar invested by the owner.  Solvency ratios, which  measure the ability of a company to survive over a long period of  time, that were used are debt to assets ratios and times interest earned rations. The debt to assets  ratios shows the Kudler’s creditors contribute 28% of total assets to the company. This low rate  shows Kudler Fine Food contributes much of its success to the business assets. The times interest earned ratio, which measure the  company’s ability to meet interest payments as they come due,  is 18.58 times. .This means the company can cover meet interest payments as many as 18 times  in the accounting period. The number is well above the average of 10.7 times. RATIO ANALYSIS MEMO The overall ratios prove Kudler Fine Foods is well above average in all areas of business,  therefore, making the company have a great success rate.  Creditors are often particularly interested in liquidity ratios because they show the ability  of a business to quickly generate needed cash to pay bills. For example, if Kudler Fine Foods  were applying for a loan then the bank would examine the liquidity ratios when they are  evaluating the loan application. Someone who is thinking about investing or already invested in  Kudler Fine Foods would be interested in the solvency ratios. These ratios indicate the amount of debt a company can handle. They also indicate the amount of investment one has in Kudler.  Profitability ratios are interesting to different stakeholders of Kudler Fine Foods for different  purposes.  The different stakeholders of Kudler Fine Foods include owners, management,  creditors and lenders.  The short and long term positions of Kudler Fine Foods are as follows; that for the short  term it can cover its debts in the present and near future. In the case of long term obligations it  has enough stability to hold off for awhile. The short as well as the long term positions of Kudler Fine Foods is dependent on the present and future performance of overall profitability. The  present profitability or performance of the company is below par for industry standards and  almost non­existent. Kudler Fine Foods needs to find a way to raise its profitability ratios in  order not only to gain a profit, but to hopefully keep the company from going under. In conclusion, Kudler Fine Foods is able to pay off its short term obligations as its current asset ratio is 16.95:1. Also, for each dollar invested the company earns \$90. When it comes to  the overall success of the company in the long run, Kudler Fine Foods is able to make its interest  payments as they come in at an amazing 18.58 times a year. Last with profitability ratios, Kudler  Fine Foods needs to look at raising its ratios to keep the company up.   Vertical Analysis RATIO ANALYSIS MEMO Kudler Fine Foods Balance Sheet (Partial) December 31, 2003                                                                                          2004                                              2003__                                                                                 Amount      Percent                 Amount       Percent          Current assets                                                                   \$ 3,717       23.8                           \$ 3,427           22.6 Property assets (net)                                                          3,990      26.2                             3,816           26.3 Other assets                                                                           6,690       50.0                              6,471           51.1 Total assets                                                                      \$14,397       100.0                          \$13,714        100.             Horizontal Analysis Kudler Fine Foods Net Sales Base Period 2003      2006__               2005__             2004____            2003       _                   \$12,996,100      \$12,234,679       \$11,577,218         \$10,796,200                 106.2%             105.7%             107.2%                 100% Liquidity ratios Current Assets =    Current Assets  =                1,971,000                                     Current Liability                   116,290     =    16.95:1 RATIO ANALYSIS MEMO Acid –test ratio =   Cash + Short­Term Investments + Receivables (Net)                                                      Current Liabilities                                    =  1,430,000 + 0 + 86,000                                          116,290                             =     13.04:1 Receivable Turnover  =            Net Credit Sales              10,796,200                                         Average Net Receivables =            86,000             =   125.54 times Inventory Turnover =     Cost of Goods Sold                          8,474,831                                                    Average Inventory      =         467,890 + 429,090 / 2         =     18.9  times Profitability Ratios Asset Turnover =  Net Sales_____ Average Assets RATIO ANALYSIS MEMO Asset Turnover =  10,796,200_   =  4.04 times  2,675,250 Profit Margin =  Net Income  Net Sales Profit Margin =  676,795___  = 0.06 %  10,796,200 Return on Assets =  Net Income___  Average Assets Return on Assets =  676,795__ =  0.25% 2,675,250 Solvency Ratio Debt to Assets RATIO ANALYSIS MEMO Total Debt       746,290 Total Assets =  2,675,250 = 0.278 rounded 0.28 Times Interest Earned Operating Income 668,950 Interest Expense =    36,000 = 18.58

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