Chapter 3 Mini Case

2790 Words Feb 7th, 2014 12 Pages
Donna Jamison was brought in as assistant to Fred Camp, Computron’s chairman, who had the task of getting the company back into a sound financial position. Computron’s 2009 and 2010 balance sheets and income statements, together with projections for 2011, are shown in the following tables. The tables also show the 2009 and 2010 financial ratios, along with industry average data. The 2011 projected financial statement data represent Jamison’s and Campo’s best guess for 2011 results, assuming that some new financing is arranged to get the company “over the hump.”

a. Why are ratios useful? What three groups use ratio analysis and for what reasons?

Financial statement ratio analysis involves comparing a firm's performance with that of
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Current ratio measures a company’s ability to pay-off short-term liabilities such as debt and payables with short-term assets such as cash, inventories, and receivables. The higher the current ratio, the more capable the company is of paying its short-term liabilities (Current Ratio, 2013)

2011 Current Ratio = Current AssetsCurrent Liabilities = $2,680,112$1,039,800 = 2.58

2010 Current Ratio = 1.5

2009 Current Ratio = 2.3

As currents assets increase and current liabilities decrease, the current ratio increases. In 2010, the decrease in the current ratio occurred because the cash on hand and short-term investments decreased while the current liabilities increased. In 2011, the current assets increased by a larger percentage than the current liabilities so the current ratio was able to increase.

Quick ratio measures the company’s ability to meet its short-term liabilities using its most liquid assets, inventories. This ratio is more conservative than the current ratio because it excludes inventory from the current assets. Inventories are excluded because companies have a hard time turning their inventory into cash (Quick Ratio, 2013).

2011 Quick Ratio = Current Assets-InventoriesCurrent Liabilities = $2,680,112-1,716,480$1,039,800 = 963,6321,039,800 = 0.93

2010 Quick Ratio = 0.5

2009 Quick Ratio = 0.8

As with the current ratio, the 2010 quick ratio decreased because the cash on hand and short-term investments

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