Ratio Analysis Memo 

ACC 291: Principles of Accounting II 

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,

2010). Liquidity ratios reveal whether or not the company is capable of paying their

debts. 

Current ratio  (current assets / current liabilities)

2011

$17,377,957 / $3,685,152 = 4.71:1

2010

$14,524,790 / 2,750,057 = 5.28:1

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, 2010).

Acid-test ratio  (cash + Short term Investments + Receivables (Net) / Current Liabilities)

2011  

$3,725,406 + $1,734,004 + $3,276,349 / $3,685,152= 2.37:1

2010

$2,807,029 + $1,609,004 + $2,798,318 / $2,750,057=2.62:1

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, 2010). 

Receivables turnover (Net credit sales / Average Net Receivables)

$66,608,660 / $3,276,349 + $2,798,318 / 2

$66,608,660 / $3,037,333

21.92

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, 2010). 

Inventory turnover (Cost of goods/ Average inventory)

2011

$51,592,470 / $9,709,611 + $8,517,203 / 2

$51,592,470 / $9,113,407

5.66

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: (Sales or revenue / total assets)2011

$66,608,660 / $47,409,1371.40

2010$56,534,254 / $414,524,790

3.89

Profit Margin:  (gross profit / total revenue)2011

$3,310,662 / $66,608,6604.97%

2010$2,430,872 / $56,534,254

4.30% 

Return on Assets: (Annual net income/ average total assets)

$3,310,662 / ($47,409,134 + $34,825,498 / 2)$3,310,662 / $41,117,317.5

8.05%

Return on Common Stockholder’s equity: (Net income / average shareholder equity)

$3,310,662 / $33,447,982 + $29,946,992 / 2$3,310,662 / $31,697,487

10.44%

Solvency ratios: The solvency ratios debt to total assets ratio and times interest earned tells creditors if a company will be able to pay maturing debt and interest. Total liabilities divided by total assets is the debt to total assets ratio. Creditors will determine if a company can pay the maturing debt by the lower the percentage of the debt to total assets ratio the more likely it will be able to pay its debts. The times interest earned is income before income taxes and interest expense divided by interest expense. The result of this ratio will tell creditors and investors the company’s ability to pay interest as it comes due. The higher the result of times interest earned the easier it is for the company to pay their interest. 

Debt to total assets ratio= (total liabilities/ total assets )2011

13961155/4740913729.45%

20104878506/34825498

14.00%

Times interest earned(Income before income taxes and interest expense/interest expense)

20115019587/1708925

2.94

20103272314/841442

3.89