Ratio Analysis Memo
ACC/291: Principles of Accounting II
University of Phoenix

MEMORANDUM
TO: Dr. Riordan, Founder and All Employees
FROM: Team A
DATE: August 15, 2011
SUBJECT: Ratio Analysis
CC: Board of Directors
Team A has completed a ratio analysis for Riordan Manufacturing. The team analyzed liquidity ratios, profitability ratios, and solvency ratios. The team also did a horizontal and vertical analysis for company’s balance sheet and the income statement.

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, 2011). Liquidity ratios reveal whether or not the company is capable of paying their debts.

Riordan’s 2.09 ratios signify that for each dollar of current liabilities, Riordan has $2.09 of current assets. The current ratio of Riordan has declined slightly since 2004.
Current ratio
2005 2004
$14,555,092 $14,643,456
$6,974,094 = 2.09 $6,029,696 = 2.43

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, 2011). Riordan’s ratio has declined in 2005. Acid-test ratio
2005 2004
$305,563 + $283,504 + $6,062,838 = 0.95 $357,216 + $133,504 + $5,657,216 = 1.02
$6,974,094