AC 211 Lecture Notes - Lecture 3: Accounting Equation, Accounts Payable, Accounting Information System
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I am having a problem getting my memo right for this math done already class, I have the math done. Heres the directions and Ill post the memo outline they gave us and the math I have doneI have to tell them yes on the loan as you will see in my answer to Part 3
Precision company wishes to expand but needs a $300,000 loan. The bank requests that Precision prepare a balance sheet and key financial ratios. Precision has kept formal records and is able to provide financial statements as of December 31, 2017. The industry debt ratio averages 45.00%. The industry return on assets is 2.0%.
You represent Ideal Bank and will present your findings in a memo to report the ratios for Precision, and identify the conclusion of your opinion reached from your analysis of the companyâs financials. The memo is to be copied and distributed to the VP of Ideal Bank, so a well-written and detailed memo is crucial. Your memo will be crucial to bank leadersâ decision to lend Precision the $300,000.
Make sure you use complete sentences. Check your work for proper spelling, grammar and punctuation.
Part 1(a) - Return on Total assets
Return on Total Assets = (Earning Before Income And Taxes)/Total Assets*100
Total Assets = $1684000
Earning before Interest and Taxes = $185000
Return on Total Assets = ($185000/$1684000)*100 = 10.99%
Part 1(b) - Its Building Block is Profitability. Profitability ratios measure the how effectively company uses its assets in generating revenue. The ratio explain the relationship between income and Resources.
Company is generating more return on total assets than the industry average. Industry average is 2% and company's return on total assets is 10.99%
Also company is having the very high profit Margin, High Return on Equity. Hence overall Position regarding Profitability is Higher than Industry's average
Part 2(a) - Debt Ratio = Total Debts/Shareholders Equity
Total Debts = $400000
Shareholders Equity = $1019000
Debt Ratio = ($400000/$1019000)*100 = 39.25%
Part 2(b) - Its Building Block is Solvency. Solvency ratio determines the ability of company to meet the liabilities of long term debts. It analyses that whether company has sufficient cash flows to repay the long term debts.
Company debt ratio is 39% which is lesser than Industry Average ratio. It says that company better manages its long term debt financing. Lower debt equity ratio is better. And debt equity ratio of more than 50% is considered unhealthy. Hence company is very much performing better than its Industries sector.
Part 3- Yes, Company is highly able to get the loan of $300000. Company is performing better than Industry averages in terms of profitability and Solvency. Also Company has current ratio of more than 2.0 which says that company has high liquidity. Hence company is Growing in business and has strong financials better than industry average. Hence Company can get the loan of $300000 for expansion
| Precision Company |
Memorandum
To: Recipient Name
From: Your Name
CC: CC Name
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