Fnt Task 1
A horizontal analysis Income Statement was performed for Company G utilizing financial data from income statements in 2011 and 2012. A listing of ratios used, calculations and year-to-year comparison follows.
1. “Current Ratio†measures the ability to pay current liabilities with current assets. The current assets divided by current liabilities. In 2011 the current ratio was 1.86. By 2012, it decreased to 1.79 rating in the lower second quartile group in the industry. Company G’s ability to repay its debt is consistent with showing a weakness from year to year based on the industry’s quartiles of 3.1 with a strong ability to cover liabilities 2.1median to 1.4 stating an weakness.
2. “Acid Test Ratio†shows us whether the entity could pay all its current liabilities if they came due immediately. It’s calculated by the available cash plus accounts receivable plus short–term investments divided by current liabilities. In 2011, the acid test ratio was 0.64. By 2012, it decreased to 0.43. Even though the acid-test ratio is less than 1 which rates in the lower third quartile in the industry of 1.6, 0.9 to 0.6, it indicates an issue with repaying current liabilities. This could stem from rapid expansion of inventory with the intentions of increasing sales. While it is a weakness and of particular concern, a rise in the ratio should be seen by 2013 due to the increase of suggested sales.
3. Next,†inventory turnover ratio†measures the number of times a company sells its inventory during a year. A high rate of turnover indicates ease in selling inventory; a low rate indicates difficulty. It’s calculated by cost of goods divided by average inventory. In 2011, the inventory turnover was 6.1. By 2012 the ratio decreased to 5.2. The decrease may be due to a slow ability to turnover merchandise in sales and paying a higher cost for goods. This is considered to be a major weakness rating in the lower third quartile group compared to industry’s
1. “Current Ratio†measures the ability to pay current liabilities with current assets. The current assets divided by current liabilities. In 2011 the current ratio was 1.86. By 2012, it decreased to 1.79 rating in the lower second quartile group in the industry. Company G’s ability to repay its debt is consistent with showing a weakness from year to year based on the industry’s quartiles of 3.1 with a strong ability to cover liabilities 2.1median to 1.4 stating an weakness.
2. “Acid Test Ratio†shows us whether the entity could pay all its current liabilities if they came due immediately. It’s calculated by the available cash plus accounts receivable plus short–term investments divided by current liabilities. In 2011, the acid test ratio was 0.64. By 2012, it decreased to 0.43. Even though the acid-test ratio is less than 1 which rates in the lower third quartile in the industry of 1.6, 0.9 to 0.6, it indicates an issue with repaying current liabilities. This could stem from rapid expansion of inventory with the intentions of increasing sales. While it is a weakness and of particular concern, a rise in the ratio should be seen by 2013 due to the increase of suggested sales.
3. Next,†inventory turnover ratio†measures the number of times a company sells its inventory during a year. A high rate of turnover indicates ease in selling inventory; a low rate indicates difficulty. It’s calculated by cost of goods divided by average inventory. In 2011, the inventory turnover was 6.1. By 2012 the ratio decreased to 5.2. The decrease may be due to a slow ability to turnover merchandise in sales and paying a higher cost for goods. This is considered to be a major weakness rating in the lower third quartile group compared to industry’s