REPORT TO CEO OF COMPANY G

Ratios help organizations not only maintain control over their daily operations but also their economic performance and financial stability. Ratios can also be used to compare organization’s performance with that of the competitors as well as the overall industry. Ratios help reveal sources of problems that may be undermining organization performance as well as areas where an organization is doing particularly well.
Ratios can be classified according to the way they are constructed and their general characteristics.
By construction, ratios can be classified as a coverage ratio, a return ratio, a turnover ratio, or a component percentage:

1. A coverage ratio is a measure of a company's ability to satisfy (meet) particular obligations.

2. A return ratio is a measure of the net benefit, relative to the resources expended.

3. A turnover ratio is a measure of the gross benefit, relative to the resources expended.

4. A component percentage is the ratio of a component of an item to the item

Financial Ratios for Company G are provided below. Company G operates a small chain of wholly owned home centers selling to consumers and contractors. Sales volume varies among the individual stores and ranges between $11 million and $20 million per year. The company is organized as a corporation and does not operate as a sub-chapter S corporation.

Measures of liquidity

Liquidity ratios provide a measure of a company’s ability to generate cash to meet its immediate needs. There are three commonly used liquidity ratios:

1. The current ratio is the ratio of current assets to current liabilities; Indicates a company's ability to satisfy its current liabilities with its current assets:

2. The Acid Test ratio is the ratio of quick assets (generally current assets less inventory) to current liabilities; Indicates a company's