Premium Essay

Financial Ratios and Asset Classification

In:

Submitted By dbiddle001
Words 811
Pages 4
1. Based on the unaudited financial statements above and the statement made by the loan officer, would the company qualify for the loan? The loan officer stated there would be no problem obtaining a loan to pay off the accounts payable accounts provided Venice InLine had a current ratio above 2.0, an acid-test ratio above 1.0, and net operating income that was at least four times the interest on the proposed loan. The current ratio measures the ability to pay sort-term debt. The acid-test ratio is calculated to show the short-term debt paying ability without relying on inventory. The operating income in excess of interest will also show the ability to pay. Based on these three tests, the company would not qualify for the loan because it does not meet the required ratio two of the three measurements. Below are the calculations. a. Current Ratio. The calculation for the current ratio is current assets divided by current liabilities. In this case, the calculation for the current year would be $290,000/$164,000. This equals a current ratio of 1.77. For the prior year, the calculation would be $302,000/$100,000 for a ratio of 3.02. Since the rate has dropped in the year, this would indicate deteriorating financial conditions, which we knew since the company could not make holiday deliveries. However, since the ratio is below 2.0 as required by the bank, the loan would not be approved for this measurement. b. Acid-test Ratio. The calculation for the acid-test ratio is (Cash + marketable securities + accounts receivable + short-term notes receivable) divided by current liabilities. For this company, the numbers would be ($70,000 + 0 + $50,000 + 0)/$164,000 = $120,00/$164,000 = 0.73. This can be translated that for every dollar of liability, the company has $0.73 to pay towards the liability. Since the bank requires the ratio to be above 1, the loan would not be

Similar Documents

Premium Essay

Ratio Analysis

...9 Ratio Analysis Introduction The analysis of the financial statements and interpretations of financial results of a particular period of operations with the help of 'ratio' is termed as "ratio analysis." Ratio analysis used to determine the financial soundness of a business concern. Alexander Wall designed a system of ratio analysis and presented it in useful form in the year 1909. Meaning and Definition The term 'ratio' refers to the mathematical relationship between any two inter-related variables. In other words, it establishes relationship between two items expressed in quantitative form. According J. Batty, Ratio can be defined as "the term accounting ratio is used to describe significant relationships which exist between figures shown in a balance sheet and profit and loss account in a budgetary control system or any other part of the accounting management." Ratio can be used in the form of (1) percentage (20%) (2) Quotient (say 10) and (3) Rates. In other words, it can be expressed as a to b; a: b (a is to b) or as a simple fraction, integer and decimal. A ratio is calculated by dividing one item or figure by another item or figure. Analysis or Interpretations of Ratios The analysis or interpretations in question may be of various types. The following approaches are usually found to exist: (a) Interpretation or Analysis of an Individual (or) Single ratio. (b) Interpretation or Analysis by referring to a group of ratios. (c) Interpretation or Analysis of ratios by trend...

Words: 5184 - Pages: 21

Free Essay

Z Score Analysis

...PREDICTING FINANCIAL DISTRESS OF COMPANIES: REVISITING THE Z-SCORE AND ZETA® MODELS Edward I. Altman* July 2000 *Max L. Heine Professor of Finance, Stern School of Business, New York University. This paper is adapted and updated from E. Altman, “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy,” Journal of Finance, September 1968; and E. Altman, R. Haldeman and P. Narayanan, “Zeta Analysis: A New Model to Identify Bankruptcy Risk of Corporations,” Journal of Banking & Finance, 1, 1977. Predicting Financial Distress of Companies: Revisiting the Z-Score and ZETA® Models Background This paper discusses two of the venerable models for assessing the distress of industrial corporations. These are the so-called Z-Score model (1968) and ZETA® 1977) credit risk model. Both models are still being used by practitioners throughout the world. The latter is a proprietary model for subscribers to ZETA Services, Inc. (Hoboken, NJ). The purpose of this summary are two-fold. First, those unique characteristics of business failures are examined in order to specify and quantify the variables which are effective indicators and predictors of corporate distress. By doing so, I hope to highlight the analytic as well as the practical value inherent in the use of financial ratios. Specifically, a set of financial and economic ratios will be analyzed in a corporate distress prediction context using a multiple discriminant statistical methodology. Through...

Words: 8723 - Pages: 35

Premium Essay

My Life

... The Balance Sheet and Financial Disclosures CHAPTER LEARNING OBJECTIVES OVERVIEW LO1 LO2 LO3 LO4 LO5 Chapter 1 stressed the importance of the financial statements in helping investors and creditors predict future cash flows. The balance sheet, along with accompanying disclosures, proAfter studying this chapter, vides relevant information useful not only in helping you should be able to: investors and creditors predict future cash flows Describe the purpose of the balance but also in the related assessments of liquidity sheet and understand its usefulness and limitations. and long-term solvency. Distinguish between current and noncurrent The purpose of this chapter is to provide assets and liabilities. Identify and describe the various balance sheet an overview of the balance sheet and asset classifications. notes to the financial statements and to Identify and describe the two balance sheet liability classifications. explore how this information is used by Explain the purpose of financial statement decision makers. disclosures. LO6 Explain the purpose of the management discussion and analysis disclosure. LO7 Explain the purpose of an audit and describe the content of the audit report. LO8 Identify and calculate the common liquidity and financing ratios used to assess risk. FINANCIAL REPORTING CASE What’s It Worth? “I can’t believe it. Why don’t you accountants prepare financial statements that are relevant...

Words: 26645 - Pages: 107

Premium Essay

Essential of Managerial Financece

...stockholder interests. True 2. If a bond is callable, and if interest rates in the economy decline, then the company can sell a new issue of low-interest-rate bonds and use the proceeds to "call" the old bonds in and have effectively refinanced at a lower rate. True 3. Risk really should not be a significant factor when making financial decision because all business decisions involve predictions about the future, which is unknown. As a result, all decisions automatically include some consideration of risk. False 4. All else equal, a dollar received sooner is worth more than a dollar received at some later date, because the sooner the dollar is received the more quickly it can be invested to earn a positive return. True 5. Current cash flow from existing assets is highly relevant to the investor. However, the value of the firm depends primarily upon its growth opportunities. As a result, profit projections from those opportunities are the only relevant future flows with which investors are concerned. False 6. Determining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements. Trend analysis is one method of measuring a firm's performance over time. True 7. A firm’s net income reported on its income statement must equal the operating cash flows on the statement of cash flows. False 8. The Securities Exchange Commission is the U.S. government agency that regulates the issuance and trading...

Words: 4526 - Pages: 19

Premium Essay

Risk Assessment Problems Resulting from the Misclassification of Leases

...disclosed in the financial statements. The aim of the IAS and AASB 117 accounting standard is to ensure that leased assets in which all the risks and returns of holding the asset are transferred to the lessee upon the commencement of the lease are disclosed in the statement of financial position. This ensures that any judgements made about the performance of the company and therefore the risk to investors and creditors is based on accurate information. There have been incidences in the past where companies have attempted to mislead investors by leasing rather than purchasing assets and misclassifying them as operating leases, thus manipulating their financial statements. This essay will define leases and outline how they are accounted for, discuss the incentives for a company to misclassify leases and how this affects the accuracy of risk assessments, and discuss the effectiveness of the AASB117 standard in countering these practices. A lease is defined as an agreement where the lessee acquires the right to use an asset from the lessor for an agreed period of time, in exchange for a series of payments (Deegan, 2012). The classification of a lease involves determining how it will be treated in the financial statements. An operating lease is a contract that conveys the right to use the asset to the lessee, but the rights of ownership remain with the lessor (Investopedia). Such a lease is not capitalized as an asset, but is treated as a rental expense. A financial lease is one that...

Words: 1185 - Pages: 5

Premium Essay

Finance Reviews

...| | | | 4. | CHAPTER-IV: FINDINGS,SUGGESTIONS AND CONCLUSION | | | | | | BIBLIOGRAPHY | | | APPENDIX | | LIST OF TABLES LIST OF CHARTS AFTER THAT CHAPTER 1,2,,3,4 OK ANY MORE DOUBT CALL ME According to Ahmed Arif Almazari (2011), this study attempted basically to measure the financial performance of some selected Jordanian commercial banks for the period 2005-2009. It is evaluatory in nature, drawing sources of information from secondary data. The financial performance of banks is studied on the basis of financial variables and ratios. In this paper an attempt was made to analyze the financial performance of seven selected Jordanian commercial banks using simple regression in order to estimate the impact of independent variable represented by; the bank size, asset management, and operational efficiency on dependent variable financial performance represented by; return on assets and interest income size. It was found that banks with higher total deposits, credits, assets, and shareholders’ equity do not always mean that has better profitability performance. It was also found that there exists a positive correlation between financial...

Words: 2967 - Pages: 12

Premium Essay

Financial Analysis

...FINANCIAL STATEMENT ANALYSIS: A TOOL FOR PERFORMANCE EVALUATION A Case Study of Oceanic Bank By IBRAHIM UMAR PGA/09/07766 M.Sc. Assignment Submitted to Dr. M.I. Kida CNA Department of Accountancy University of Maiduguri 2Financial Statement Analysis: A Tool for Performance Evaluation Jan. 2010 3Financial Statement Analysis: A Tool for Performance Evaluation ABSTRACT Financial statements are prepared to meet external reporting obligations and also for decision making purposes. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements. There are various methods or techniques that are used in analyzing financial statements, such as comparative statements, schedule of changes in working capital, common size percentages, trend analysis and ratios analysis. This study intends to analyze financial statement of Oceanic bank in Nigeria in order to come up with an in-depth fact finding on its performance and to see if there is any connection between the recent global economic crisis and its overall performance. 4Financial Statement Analysis: A Tool for Performance Evaluation INTRODUCTION 1.1 Background Financial statement represents...

Words: 5278 - Pages: 22

Premium Essay

Sample Test

...Service. c. Financial Accounting Standards Board. d. Corporate Board of Directors. 2. An increase in an expense a. increases revenues. b. increases assets. c. decreases liabilities. d. decreases capital. 3. A corporation with total owners’ equity of $85,000 paid a $5,000 business debt. As a result of this transaction, total capital equity a. did not change. b. increased by $5,000. c. decreased by $5,000. d. increased to $90,000. 4. The right side of an account is always a. the debit side. b. the credit side. c. the balance of that account. d. carried forward to the next accounting period. 5. Posting is the process of a. preparing a chart of accounts. b. adding a column of figures. c. transferring journal entries to ledger accounts. d. recording entries in a journal. 6. The purpose of recording depreciation on productive assets is to a. reflect the decline in the market value of the assets each period. b. reduce income when the company has an exceptionally profitable year. c. be in conformity with the revenue recognition principle. d. allocate the original cost of a productive asset to expense over its useful life. 7. Murray Company debited Prepaid Insurance for $960 on July 1, 2001, for a one-year fire insurance policy. If the company prepares monthly financial statements, failure...

Words: 1882 - Pages: 8

Premium Essay

Social Analysis

...accounting ratios Javier de Andrés ⇑, Manuel Landajo, Pedro Lorca University of Oviedo, Spain a r t i c l e i n f o a b s t r a c t In this paper we address the bankruptcy prediction problem and outline a procedure to improve the performance of standard classifiers. Our proposal replaces traditional indicators (accounting ratios) with the output of a so-called multinorm analysis. The deviations of each firm from a battery of industry norms (computed by nonparametric quantile regression) are used as input variables for the classifiers. The approach is applied to predict bankruptcy of firms, and tested on a representative data set of Spanish firms. Results indicate that the approach may provide significant improvements in predictive accuracy, both in linear and nonlinear classifiers. Ó 2011 Elsevier B.V. All rights reserved. Article history: Received 9 February 2011 Received in revised form 2 October 2011 Accepted 3 November 2011 Available online 30 December 2011 Keywords: Bankruptcy prediction Classification techniques Nonparametric methods Quantile regression Accounting ratios 1. Introduction Under the current economic conditions, bankruptcy early warning systems have become tools of key importance in order to guarantee the stability of the economy, as a consequence of their potential to avoid losses to stockholders, creditors, managers and other interested parties. The passing of the Basel II accord makes the need for accurate systems to predict financial distress even...

Words: 10207 - Pages: 41

Free Essay

Financial Analysis

...Financial Statement Analysis Financial Statement Analysis 39 Common‐Size  Financial Statements • Balance sheet items as a percentage of  ______________________. Income statement items as a percentage of  ______________________. • 40 Suzie Q Corporation Balance Sheet December 31, 2011 Assets: Current Assets: Cash Accounts Rec. Inventory Total CA Fixed Assets: Net Fixed Assets Total Assets Liabilities & Equity: Current Liabilities: 12.5% Accts. Payable 21.9% Notes Payable Total CL 24.2% 58.6% Long‐term Debt: Common Stock 41.4% Retained Earnings 100.0% Total Liab. & S.E. $ 80 140 155 $375 265 $640 $ 95 110 $205 120 40 275 $640 14.8% 17.2% 32.0% 18.8% 6.2% 43.0% 100.0% 41 FINC 3610 ‐ Yost Financial Statement Analysis Suzie Q Corporation Income Statement For Year Ended December 31, 2011 Sales Cost of Goods Sold SG&A Expenses Depreciation EBIT Interest Expense EBT Taxes Net Income $910 470 210 60 $170 40 $130 52 $78 100.0% 51.6% 23.1% 6.6% 18.7% 4.4% 14.3% 5.7% 8.6% 42 Classification of Financial Ratios • • Short‐term Solvency or Liquidity Ratios Long‐term Solvency or Financial Leverage  Ratios Asset Management or Turnover Ratios Profitability Ratios Market Value Ratios 43 • • • Short‐term Solvency (Liquidity) Ratios • Current Ratio • Quick (Acid‐Test) Ratio • Cash Ratio • Net Working Capital to Total Assets • Interval Measure 44 FINC 3610 ‐ Yost Financial Statement Analysis Long‐term Solvency (Financial Leverage) Ratios ...

Words: 415 - Pages: 2

Premium Essay

Corporate Finance Potter

...ACCOUNTING IN CONTEXT POTTER I LIBBY I LIBBY I SHORT ACCOUNTING IN CONTEXT BRADLEY N. POTTER University of Melbourne ROBERT LIBBY Cornell University PATRICIA A. LIBBY Ithaca college DANIEL G. SHORT Texas Christian University Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis Bangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto Copyright © 2009 McGraw Hill Australia Pty Limited Additional owners of copyright are acknowledged in page credits. Every effort has been made to trace and acknowledge copyrighted material. The authors and publishers tender their apologies should any infringement have occurred. Reproduction and communication for educational purposes The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10% of the pages of this work, whichever is the greater, to be reproduced and/or communicated by any educational institution for its educational purposes provided that the institution (or the body that administers it) has sent a Statutory Educational notice to Copyright Agency Limited (CAL) and been granted a licence. For details of statutory educational and other copyright licences contact: Copyright Agency Limited, Level 15, 233 Castlereagh Street, Sydney NSW 2000. Telephone: (02) 9394 7600. Website: www.copyright.com.au Reproduction and communication for other purposes Apart from any fair dealing for the...

Words: 7672 - Pages: 31

Free Essay

Automotive Industry

...SUMMARY Ratio Analysis is one of the techniques of financial analysis where ratios are used as a yardstick for evaluating the financial condition and performance of a firm. Analysis and interpretation of various accounting ratios gives a better understanding of financial condition and performance of firm. Trend ratios indicate the direction of change in the performance – improvement, deterioration or constancy- over the year. Objectives of the study: 1. To help the management in its planning and forecasting activities. 2. To evaluate operational efficiency, liquidity, and solvency of NSL. 3. To help the management in having effective control over the activities of different departments. 4. To compare the previous five years and present year performance of the company. 5. To give suggestion and recommendation based on the study. For the study Nirani sugars Ltd, is considered. The ratio analysis is done using the Income statements and Balance Sheets of the company between 2005 to 2009. Data Interpretation on trend ratio analysis is carried out at NSL at Kulali cross Tq: Mudhol Dist: Bagalkot Karnataka State. For study, of five years is considered and compared it’s performance over the period of five years. For result analysis and MS Excel Software package are used. From the analysis, I am able to indicate following finding of the firm 1. From the current ratio it is found that the ratio is not satisfactory because the % increase in current assets is less...

Words: 10300 - Pages: 42

Premium Essay

Gce a Levels Principal of Accounting 2015

...PRINCIPLES OF ACCOUNTING Higher 2 (2016) (Syllabus 9755) CONTENTS Page INTRODUCTION 2 AIMS 2 ASSESSMENT OBJECTIVES 2 SPECIFICATION GRID 2 SCHEME OF ASSESSMENT 3 SYLLABUS OUTLINE 3 SYLLABUS CONTENT 5 SUMMARY OF COMMONLY USED RATIOS 15 RESOURCES 16 Singapore Examinations and Assessment Board  MOE & UCLES 2014 1 9755 H2 PRINCIPLES OF ACCOUNTING (2016) INTRODUCTION Principles of Accounting aims to provide candidates with a foundation course in accounting at a breadth and depth appropriate to the A Level. It is designed to provide candidates with a sound understanding of financial and managerial accounting procedures and an appreciation of its role in society. The teaching approach emphasises the broad educational aspects of the subject rather than one which is vocational or professional in nature. There is no requirement to learn the published accounting standards. Prior knowledge is not necessary for students offering this syllabus. It is not the intent of this syllabus to be a pre-requisite for any business-related courses. AIMS 1. Develop an understanding of the concepts, principles and practices of accounting and the ability to apply them in a variety of business and personal situations; 2. Develop an understanding of the role of accounting as an information system for monitoring, problemsolving and decision-making in changing economic, social and technological environments; 3. Develop a critical approach to analysing and evaluating accounting policies...

Words: 4608 - Pages: 19

Premium Essay

Intermediate Accouting

...Chapter 3 The Balance Sheet and Financial Disclosures AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments, and faculty may approach assessment and its documentation differently, one approach is to provide specific questions on exams that become the basis for assessment. To aid faculty in this endeavor, we have labeled each question, exercise, and problem in Intermediate Accounting, 7e with the following AACSB learning skills: |Questions |AACSB Tags |Exercises (cont.) |AACSB Tags | |3–1 |Reflective thinking |3–3 |Reflective thinking | |3–2 |Reflective thinking |3–4 |Analytic | |3–3 |Reflective thinking |3–5 |Analytic | |3–4 |Reflective thinking |3–6 |Analytic | |3–5 |Reflective thinking |3–7 |Analytic | |3–6 |Reflective thinking ...

Words: 12378 - Pages: 50

Premium Essay

Intermediate Accounting Solutions

...Chapter 3 The Balance Sheet and Financial Disclosures Questions for Review of Key Topics Question 3-1 The purpose of the balance sheet, also known as the statement of financial position, is to present the financial position of the company on a particular date. Unlike the income statement, which is a change statement that reports events occurring during a period of time, the balance sheet is a statement that presents an organized array of assets, liabilities, and shareholders’ equity at a point in time. It is a freeze frame or snapshot picture of financial position at the end of a particular day marking the end of an accounting period. Question 3-2 The balance sheet does not portray the market value of the entity (number of common stock shares outstanding multiplied by price per share) for a number of reasons. Most assets are not reported at fair value, but instead are measured according to historical cost. Also, there are certain resources, such as trained employees, an experienced management team, and a good reputation, that are not recorded as assets at all. Therefore, the assets of a company minus its liabilities, as shown in the balance sheet, will not be representative of the company’s market value. Question 3-3 Current assets include cash and other assets that are reasonably expected to be converted to cash or consumed during one year, or within the normal operating cycle of the business if the operating cycle is longer than...

Words: 12426 - Pages: 50