ACC 291 Week 5 Learning Team Assignment Ratio Analysis Memo
ACC 291 Week 5 Learning Team Assignment Ratio Analysis Memo
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Date Created: 11/13/15
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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