Memorandum
To: Company G CEO
From: ********* *******
Date: xx/xx/xxxx
Re: Company G Financial Status
Explanation of Ratios
The purpose of this memo is to provide a brief explanation of the different ratios and trends used to analyze the current financial strength of Company G. The following information will not only provide insight into how Company G is doing, in comparison to last year, but it will also provide a cross-comparison to industry-wide benchmarks, allowing Company G to see how it measures up to its competitors.
***Many of the following ratio formulas call for dividing one financial statement category by the average number of another category. The average is found by adding the beginning and ending numbers of the given category for the period, and dividing by 2.

Current Ratio - The current ratio is used to help the company assess its ability to use assets like cash, inventory and accounts receivable, to pay its short-term liabilities, such as accounts payable, wages, etc. The higher the ratio, the more likely a company is able to pay its short-term debts. This ratio can be found by dividing current assets by current liabilities. Year 12 shows Company G has a current ratio of 1.76, which is down .1 from year 11. This ranks above the first industry data quartile of 1.4, but below the second and third quartiles of 2.1 and 3.1, respectively.
Because this ratio has not only declined in the last year, but is also much closer to the lowest quartile, these numbers indicate a small, but growing, weakness, in regards to short-term solvency.
Acid-test Ratio – This ratio is similar to the current ratio, in that it is used to determine a company’s ability to pay its short-term liabilities, except that inventory is excluded when figuring into the company’s assets. To solve for the acid-test ratio, add cash, accounts receivable and short-term