Accounting_231

Ratio Analysis Memo Elena Alvarez XACC/291 October 6, 2013 Reinaldo Fernandez Ratio Analysis Memo Financial ratio analysis involves calculating certain standardized relationship between figures appearing in the financial statements and then using those relationships called ratios to analyze the business financial position and financial performance. Due to varying size of businesses different comparison of two businesses is not possible. Certain techniques have to be applied in simplifying the financial statements and making them comparable. These include financial ratio analysis and common-size financial statements. Ratios are divided into different categories such as liquidity ratios and profitability ratios. Financial ratios express relationships between financial statement items. Although they provide historical data, management can use ratios to identify internal strengths and weaknesses, and estimate future financial performance. Investors can use ratios to compare companies in the same industry. Ratios are not generally meaningful as standalone numbers, but they are meaningful when compared to historical data and industry averages. Huffman Trucking’s current ratio within the liquidity ratio during 2 years indicates an increase. The Quick ratio within the liquidity ratio also indicates an increase. Since prospective lenders want to see a positive current ratio, they would be a type of user that would be interested in this type of ratio. Since the quick ratio evaluates Huffman Trucking’s creditworthiness, investors would be the type of user interested in this type of ratio. The receivables turnover also is a part of measuring liquidity. It measures how quickly Huffman Trucking can convert certain of their assets to quick cash. It also tells how many times on average Huffman Trucking collects its receivables during a given period. This indicates Huffman Trucking’s debt collection ability. The receivables turnover ratio gives an indication if Huffman Trucking is having difficulty collecting from their credit made sales. The formula for Huffman Trucking to use to find this ratio is the net receivable sales divide average accounts receivables. The inventory turnover measures the number of times on average that Huffman Trucking sells inventory during a given period. Inventory turnover tells how often profit can be made through inventory. The formula to compute this ratio is the cost of goods sold ÷ the average inventory. Current ration: current assets/current liabilities, $147,800/90,283=1.637. Quick Ratio: Cash plus accounts receivable/current liabilities, $89,664+51,869/90,283=1.567. Huffman Trucking Solvency ratios after reviewing the balance sheet and income statement the calculation are resulted in: debt to total assets, total debt/total assets $90,283+147,800/267,265= 89.0%. Times interest earned, income before income taxes and interest expense/interest expense $59,167/466= 126.9 times. References Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial accounting (7th ed.). Hoboken, NJ: John Wiley & Sons. http://accountingexplained.com/financial/ratios/