Memo Letter To CEO Essay

Ratio Analysis Memo

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ACC/291 – Principles of Accounting II
Running head: MEMO LETTER TO CEO

Riordan Manufacturing Memo

To: CEO

From: Accounting Department

As you may be aware of, the Riordan Manufacturing company that has a significant amount of daily economic activity. The importance of staying one step ahead of what is needed to meet the customers’ needs is essential to our business to continue moving forward toward a successful future. In this memo, a thorough breakdown and overview of past financial years for review. Each ratio and financial accounting data is broken down by types of ratios along with their data accordingly. We will discuss liquidity ratios, profitability ratios, and solvency ratios to clarify the current status of the company and how our day-to-day operations have been performed in these years.

The data collected shows that there has been a positive increase in our finances that allows us many options for the future, including expanding our services to other areas. Riordan Manufacturing is known to be a global plastics manufacturer employing 550 people with projected annual earnings of $46 million. The liquidity ratio shows that we have shown the ability to pay our short-term obligations and meet any unexpected needs for cash. Our profitability ratio shows that our company has experienced success and growth within the company with a positive outlook for the future. Our solvency ratio shows that we have a proven track record of success, continue to be a strong force in our market, and have a great outlook and plans for sustained success in the future. Long-term creditors, Short-term Creditors, analysts, and investors alike are very interested in these ratios. With our financials and ratios, these analysts will be able to make a favorable decision because of the growth and expansion in these tough economic times.

Our future lies with the type of users who take interest in a company’s financial calculation of ratios are internal and external users. Internal users consist of a companies owners, financial managers, and employees. Internal users focus their attention on the three ratio classifications to determine their ability to be profitable, liquidate, and their survival rate (“Financial Ratio Users,” 2013). Internal users also calculate and evaluate the different ratios to help adequately make sound decisions of a company’s financial position, future, and monetary obligations. External users are made up of investors, creditors, bondholders, and government agencies. The external users make sure that financial data is disclosed of properly and by no means contain any fraudulent material. These users also verify that companies follow the GAAP standards to ensure that accurate recording and reporting takes place. Other external users determine the possible risks and rewards that come when choosing to invest or lend to businesses.

The reason that internal and external users are interested in such ratios is so they can each determine what a company’s strengths and weaknesses are. They can also evaluate the financial position of a company along with the forecasting of current and future business trends. The ratio classifications are liquidity, profitability, and solvency. Liquidity measures short-term ability to pay financial obligations and meet financial needs of a company. Liquidity measures a company’s cash inflow and how it successfully uses it to help their company grow and prosper.

Finally, solvency relates to the long-term creditors and stockholders of a company and its ability to keep them financially informed and interested through debt and interest payments (Weygandt & Kieso, 2010). What does the collected data reveal about the company’s performance and position? Based upon the latest information, it would appear that Riordan Manufacturing is in a stable and solid position. Whereas the data shows an increase in operating costs, it also shows in increase in sales and profitability. Riordan Manufacturing has had very high current ratios for the past two years. This is a company that has good financial strength and should be able to meet any unexpected short term debt. During this current period of economic uncertainty, the ability to meet unexpected downturns is an advantage that many other companies do not possess.

Examining the data for profitability shows a company is in a position to continue to do well in the future. Being a manufacturer of goods for other manufacturers is a good position to be in during economic lulls. By offering product to multiple manufacturers, we are not locked in to one product in one market that could be a potential liability due to market fluctuations. Comparing out debt to our assets shows that we are a financially flexible company that lenders will look favorably upon should we need to borrow money in the future. In conclusion, it would appear that Riordan Manufacturing is a dependable company with good financial strength and flexibility. This is a company that appears attractive to both lenders and investors, current or future.

LIQUIDITY RATIOS

CURRENT RATIO
Year
Total Current Assets
Total Current Liabilities
Current Ratios
2009
$229,299.00
$18,181.00
12.61:1
2010
$458,595.00
$32,161.00
14.25:1
2011
$538,532.00
$34,810.00
15.47:1

To find the current ratio you need to look on the company’s balance sheet. You take the current total assets and divide by the total current liabilities. This gives you your current ratio. The higher the ratio, the more liquidity the company has and the more likely they are to be able to pay short term debt. A ratio of two or better is considered to be a good indicator of financial strength. As can be seen here, Riordan Manufacturing has had very high current ratios for the past three years. This is a company that has good financial strength and should be able to meet any unexpected short term debt.

ACID TEST RATIO
Year
Current Assets
Current Inventory
Current Liability
Acid Test Ratio
2009
$229,299.00
$33,713.00
$18,181.00
10.76:1
2010
$458,595.00
$67,426.00
$32,161.00
12.16:1
2011
$538,532.00
$87,654.00
$34,810.00
12.95:1

To find the acid test ratio you need to turn to the company’s balance sheet once again. You take the current total assets, subtract the current inventory, and divide that total by the current liabilities. Much like the current ratio, a higher number is generally considered better for the acid test ratio. An acid test ratio of 1.0:1 would show that a company has 1 dollar of easily convertible assets for every dollar of liability. A higher ratio shows that a company has a higher economic strength. Riordan Manufacturing shows that they have several dollars of assets available for each dollar of liabilities with each year being better than the last.

RECEIVABLES TURNOVER
Year
Net Sales
Beginning Accounts Receivable
Ending Accounts Receivable
Receivables Turnover Ratio
2010
$437,540.00
$61,685.00
$123,369.00
4.73:1
2011
$504,393.00
$123,369.00
$125,220.00
4.06:1

To find the receivables turnover ratio you must look on both the income tatement and the company’s balance sheet. On the income sheet, you will need to look up the net sales. On the balance sheet you will need to look up the average accounts receivable for the period of the ratio. This can be determined by adding the beginning AR for the period and the ending AR for the period and dividing them by two. This number is divided into the net sales number to give you the receivables turnover ratio. The higher the number, the better as far as this ratio is concerned. A higher number means that the company is better at collecting on its credit sales. However, too high of a number may repel potential customers because it may mean that the company credit policy is too strict.

INVENTORY TURNOVER
Year
Cost of Goods Sold
Inventory
Average inventory
Inventory Turnover
2010
$43,970,250.00
$8,517,203.00
$7,820,496.50
5.62%
2011
$51,592,470.00
$9,709,611.00
$9,113,407.00
5.66%

Inventory turnover is a liquidity ratio that measures the number of times on average the inventory is sold during the period. It measures the liquidity of the inventory and can be calculated by taking the cost of goods and dividing by the average inventory. Management and investors would be interested in this type of ratio and will allow them to research and compare these findings to industry averages.

PROFITABILITY RATIOS
ASSET TURNOVER
Year
Sales
Assets
Average Assets
Asset Turnover
2010
$66,608,660.00
$34,825,498.00
$17,412,749.00
1.37%
2011
$56,534,254.00
$47,409,137.00
$23,704,568.50
1.62%

Asset Turnover lets you measure how efficiently a company uses its assets to generate sales. We determine this by dividing net sales by average assets. The number we get from that will show the dollar of sales produced by each dollar invested in assets. Managers, creditors, and investors alike can use this information to research and base decisions on. This ratio shows that the company has $1.62 dollars of sales produced by each dollar invested in assets.

PROFIT MARGIN
Year
Net Income
Sales
Profit Margin
2010
$3,310,662.00
$66,608,660.00
4.97%
2011
$2,430,872.00
$56,534,254.00
4.30%

Profit Margin is a measure of the percentage of each dollar of sales that will result in net income. To calculate this we take the net income and divide it by the nets sales of the company. This is a very important part of the company financial information and can be useful to investors, creditors, and management to make informed decisions and strategies.

RETURN ON ASSETS
Year
Total Assets
Average Assets
Net Profit After Taxes
Percentage
2010
$34,825,498.00
$17,412,749.00
$2,430,872.00
13.9%
2011
$47,409,137.00
$23,704,568.50
$3,310,662.00
13.9%

Return on assets ratio is an indicator of how profitable a company is relative to its total assets. To calculate this percentage you have to divide net income and average assets for each year. Average assets can be calculated by dividing the total current assets number by 2.

RETURN ON COMMON STOCKHOLDERS’ EQUITY
Year
Total Assets
Net Profit After Taxes
Total Stockholders’ Equity
Common Stock
Par Value $0.01
Return on Equity
Preferred Dividend Cost
2010
$34,825,498.00
$4,430,872.00
$29,946,992.00
$29,055,488.00
83.4%
16.2%
$0.83
2011
$47,409,137.00
$3,310,662.00
$33,447,982.00
$29,055,488.00
13.9%
19.7%
$0.61

Return on equity is the amount of net income returned as a percentage of shareholders equity. This can be calculated by subtracting net income from preferred dividends total and dividing that result with average common stockholders’ equity. The average equity can be calculated by dividing the total in 2.

SOLVENCY RATIOS

DEBT TO TOTAL ASSETS RATIO
YEAR
TOTAL RATIO PERCENTAGE
2010
$13,961,155.00 ÷ $47,409,137.00
29.4%
2011
$4,878,506.00 ÷ $34,825,498.00
14.0%

The debt to total assets ratio is total debt/total assets, it is used in companies on financial statements to correctly measure the percentage of total assets provided by creditors (Weygandt & Kieso, 2010 p. 694).

INTEREST RATIO
Year
Income Before Taxes
Interest Expense
Times Interest Earned
2010
$3,272,314.00
$121,533.00
27
2011
$5,019,587.00
$604,616.00
8

Calculating the amount of times interest was earned it is to measure a company’s ability to meet its debt obligations. The lower the number, the better management that time period had. To calculate this result income before taxes has to get divided with interest expenses.

Horizontal Analysis

Riordan Manufacturing, Inc.
Balance Sheet

Increase/Decrease During 2011
Type
2011
2010
Amount
Percentage
ASSETS
Cash
$3,725,406.00
$2,807,029.00
$918,377.00
32.7%
Accounts Receivables
$3,192,094.00
$2,695,342.00
$496,752.00
18.4%
Current Portion of Notes Receivable
$84,255.00
$102,976.00
($18,721.00)
(18.2%)
Inventories
$9,709,611.00
$8,517,203.00
$1,192,408.00
14.0%
Prepaid Expense ; Other Items
$666,591.00
$402,240.00
$264,351.00
65.7%
Total Current Assets
$17,377,957.00
$14,524,790.00
$2,853,167.00
19.6%

Notes Receivables Less Current Portion
$842,551.00
$936,168.00
($93,617.00)
(10.0%)
Investment in Joint Venture
$1,734,004.00
$1,609,004.00
$125,000.00
7.8%
Property, Plant ; Equipment – Net
$26,366,949.00
$16,658,218.00
$9,708,731.00
58.3%
Intangible Assets-Net
$904,473.00
$904,473.00
$0
0%
Other Assets
$183,203.00
$192,845.00
($9,642.00)
(5.0%)
Total Assets
$47,409,137.00
$34,825,498.00
$12,583,639.00
$36.1%

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Portion of Long-Term Debt
$1,560,959.00
$474,032.00
$1,086,927.00
229.3%
Accounts Payable
$1,141,561.00
$1,391,385.00
($249,824.00)
(17.9%)
Accrued Liabilities
$430,477.00
$524,685.00
($94,208.00)
(17.9%)
Income Taxes Payable
$552,155.00
$359,955.00
$192,200.00
53.4%
Total Current Liabilities
$3,685,152.00
$2,750,057.00
$935,095.00
34.0%

Type
2011
2010
Amount
Percentage
Bank Line of Credit
$114,759.00
$295,865.00
($181,106.00)
(61.2%)
Long-Term Debt Less Current Portion
$9,500,741.00
$1,006,955.00
$8,493,786.00
843.5%
Deferred Income Taxes
$660,503.00
$825,629.00
($165,126.00)
(20%)
Total Liabilities
$13,961,155.00
$4,876,506.00
$9,082,649.00
86.2%

Common Stock Par Value $0.01
$29,055,488
$29,055,488
$0
0%
20,000 Shares Authorized Issued ; Outstanding 15,801,332 Net of Treasury Shares Retained Earnings – [Accumulated Deficit]
$4,392,494.00
$891,504.00
$3,500,990.00
392.7%
Total Stockholders’ Equity
$33,447,982.00
$29,946,992.00
$3,500,990.00
$11.7%

Total Liabilities ; Stockholders’ Equity
$47,409,137.00
$34,825,498.00
$12,583,639.00
36.1%

Riordan Manufacturing, Inc.
Income Statement

Increase/Decrease During 2011
Type
2011
2010
Amount
Percentage
Sales
$66,608,660.00
$56,534,254.00
$10,074,406.00
17.8%
Direct Cost of Goods Sold
$51,592,470.00
$43,970,250.00
$7,622,220.00
17.3%
Gross Margin
$15,016,190.00
$12,564,004.00

$2,452,186.00
19.5%

OPERATING EXPENSES
Sales, Marketing ; Other
$1,328,615.00
$1,265,348.00
$63,267.00
4.9%
Depreciation
$1,378,616.00
$1,152,125.00
$226,491.00
19.7%
Quality Assurance
$1,151,176.00
$1,112,247.00
$38,929.00
3.5%
Research ; Development
$1,039,637.00
$962,627.00
$77,010.00
7.9%

Type
2011
2010
Amount
Percentage
General ; Administrative
$4,954,751.00
$4,674,293.00
$280,458.00
6.0%
Machining ; Systems
$143,808.00
$125,050.00
$18,758.00
15.0%
Total Operating Expenses
$9,996,603.00
$9,291,690.00
$704,913.00
7.6%
Profit Before Interest ; Taxes
$5,019,587.00
$3,272,314.00
$1,747,273.00
53.4%

NON-OPERATING EXPENSES
Interest Expense
$604,616.00
$121,533.00
$483,083.00
3.9%
Taxes
$1,104,309.00
$719,909.00
$384,400.00
53.4%
Total Non-Operating Expenses
$1,708,925.00
$841,442.00
$867,483.00
1.0%
Net Profit After taxes
$3,310,662.00
$2,430,872.00
$879,790.00
36.2%

Vertical Analysis Riordan Manufacturing, Inc.
Balance Sheet

2011
2010
Type
Amount
Percentage
Amount
Percentage
ASSETS
Cash
$3,725,406.00
7.9%
$2,807,029.00
8.1%
Accounts Receivable
$3,192,094.00
6.7%
$2,695,342.00
7.7%
Current Portion of Notes Receivable
$84,255.00
0.2%
$102,976.00
0.3%
Inventories
$9,709,611.00
20.5%
$8,517,203.00
24.5%
Prepaid Expenses and Other Items
$666,591.00
1.4%
$402,240.00
1.2%
Total Current Assets
$17,377,957.00
36.7%
$14,524,790.00
41.7%

Notes Receivables, Less Current
$842,551.00
1.8%
$936,168.00
2.7%
Investment in Joint Venture
$1,734,004.00
3.7%
$1,609,004.00
4.6%
Type
Amount
Percentage
Amount
Percentage
Property, Plant and Equipment – Net
$26,366,949.00
55.6%
$16,658,218.00
47.8%
Intangible Assets-Net
$904,473.00
1.9%
$904,473.00
2.6%
Other Assets
$183,203.00
0.4%
$192,845.00
0.6%
Total Assets
$47,409,137.00
100.0%
$34,825,498.00
100.0%

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Portion of Long-Term Debt
$1,560,959.00
3.3%
$474,032.00
1.4%
Accounts Payable
$1,141,561.00
2.4%
$1,391,385.00
3.9%
Accrued Liabilities
$430,477.00
0.9%
$524,685.00
1.5%
Income Taxes Payable
$552,155.00
1.2%
$359,955.00
1.0%
Total Current Liabilities
$3,685,152.00
7.8%
$2,750,057.00
7.9%

Bank Line of Credit
$114,759.00
0.3%
$295,865.00
0.8%
Long-Term Debt Less Current Portion
$9,500,741.00
20.0%
$1,006,955.00
2.9%
Deferred Income Taxes-Net
$660,503.00
1.4%
$825,629.00
2.4%
Total Liabilities
$13,961,155.00
29.4%
$4,878,506.00
14.0%

Common Stock Par Value $0.01
$29,055,488.00
61.3%
$29,055,488.00
83.4%
20,000 Shares Authorized Issued ; Outstanding 15,801,332 Net of Treasury Shares Retained Earning
$4,392,494.00
9.3%
$891,504.00
2.6%
Type
Amount
Percentage
Amount
Percentage
Total Stockholders’ Equity
$33,447,982.00
70.6%
$29,946,992.00
85.9%
Total Liabilities ; Equities
$47,409,137.00
100.0%
$34,825,498.00
100.0%
Riordan Manufacturing, Inc.
Income Statement

2011
2010
Type
Amount
Percentage
Amount
Percentage
Sales
$66,608,660.00
443.6%
$56,534,254.00
449.9%
Direct cost of Goods Sold
$51,592,470.00
343.6%
$43,970,250.00
349.9%
Gross Margin
$15,016,190.00
100.0%
$12,564,004.00
100.0%

OPERATING EXPENSES
Sales, Marketing ; Other
$1,328,615.00
8.8%
$1,265,348.00
10.1%
Depreciation
$1,378,616.00
9.2%
$1,152,125.00
9.2%
Quality Assurance
$1,151,176.00
7.7%
$1,112,247.00
8.9%
Research ; Development
$1,039,637.00
6.9%
$962,627.00
7.7%
General ; Administrative
$4,954,751.00
32.9%
$4,674,293.00
37.2%
Machining ; Systems
$143,808.00
0.9%
$125,050.00
0.9%
Total operating Expenses
$9,996,603.00
66.6%
$9,291,690.00
73.9%
Profit before Interest ; Taxes
$5,019,587.00
33.4%
$3,272,314.00
26.0%

NON-OPERATING EXPENSES
Interest Expense
$604,616.00
4.0%
$121,533.00
10.%
Taxes
$1,104,309.00
7.4%
$719,909.00
5.7%
Total Non-Operating Expenses
$1,708,925.00
11.4%
$841,442.00
6.7%
Net Profit After Taxes
$3,310,662.00
22.0%
$2,430,872.00
19.3%

References

Weygandt, J.J., Kimmel, P.D., ; Kieso, D.E. (2010). Financial accounting (7th ed.). Hoboken, NJ: John Wiley ; Sons.

Raiborn, Cecily A. Watson, Stephanie F. Survey of Accounting. Chapter 1: An Introduction to the Role of Accounting in the Business World. Copyright 2003 John Wiley ; Sons, Inc.

Financial Ratio Users. (2013). Retrieved from http://icabtutorial.com/who-are-the-users-of-financial-ratio/

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