Click the Virtual Organization link on the student Web site to access the Virtual Organizations.
Select one of the Virtual Organizations as the basis for the assignment.
Obtain faculty approval of your selected organization before beginning the assignment.
Access the information contained in your selected organization’s balance sheet and income statement to calculate:
· Liquidity ratios
o Current ratio
o Acid-test, or quick, ratio
o Receivables turnover
o Inventory turnover
· Profitability ratios
o Asset turnover
o Profit margin
o Return on assets
o Return on common stockholders’ equity
· Solvency ratios
o Debt to total assets
o Times interest earned
Show your calculations for each ratio.
Create a horizontal and vertical analysis for the balance sheet and the income statement.
Prepare a 350- to 750-word memo to the CEO of your selected organization in which you discuss your findings from your ratio calculations and your horizontal and vertical analysis. In your memo, address:
· What the liquidity, profitability, and solvency ratios tell you about the financial position of the company
· Which users may be interested in each type of ratio
· What the collected data tells you about the performance and position of the company
TO: CEO, Riordan Manufacturing, Inc.
FROM: Finance Team A
SUBJECT: Ratio Calculations and Horizontal and Vertical Analysis
Finance Team A has carried out many key financial ratio computations and produced a vertical and horizontal analysis for Riordan’s balance sheet and income report. By interpreting the ratios and determining important tendencies during a period of time, useful insight can be obtained with regards to the financial performance of the organization. The following summarizes the use of ratios and gives a short evaluation of Riordan’s financial position depending on the accumulated data.
Liquidity, profitability, and solvency ratios: Liquidity ratios measure the company’s capability to meet short-term commitments because they come due and to meet unpredicted requirements for cash. As a result, short-term lenders such as bankers and vendors might have a particular interest in these ratios. Profitability ratios evaluate the capability to earn a reasonable profit on sales, assets, and working capital. The operating success of a firm is eventually evaluated with regards to earning power and profit; therefore these ratios are of particular significance to lenders and investors. Solvency ratios may be used to evaluate the overall debt status of the organization and assess its financial prospect in the long run. Debt-paying capability is a primary concern of long-term lenders, shareholders, and bondholders. Internal and external users of financial statements will attach different levels of significance to different ratios based on their goals, however when liquidity, profitability, and solvency ratios are studied collectively, much can be evaluated about a company’s financial performance and status.