Accounting and Finance for Your Small Business Second Edition_9

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Accounting and Finance for Your Small Business Second Edition_9 Evaluating the Operations of the Business SECTION III Fast food outlets, therefore, turn over inventory at a tremen- dous rate and generate continuous streams of cash. At any one point, the company may not have large amounts of cash on hand if it is using cash to retire longer-term debt or to acquire additional fixed assets. By comparing the company’s own historic trend in the current ratio, and examining those ratios with other fast food out- lets, you can perhaps see that a 1:4 ratio may be even better than a 1:2 ratio. The traditional rule of thumb may not be applicable or representative of the fast food industry. The point of this example is that you should consider those ratios that make sense for the busi- ness, give usable management information, and can be obtained on a timely basis. Figure 6.1 shows a balance sheet and statement of earnings that will be used to demonstrate the financial ratios. Types of Financial Ratios Liquidity Ratios Liquidity ratios give an indication of a company’s ability to meet short-term obligations. These ratios give some insight into the pres- ent cash solvency and are a measure of the company’s ability to meet adversity. Generally, liquidity ratios look at the short-term assets or resources and the short-term debts and obligations. Current Ratio. As discussed in Chapter 5, the current ratio is the ratio of: Current assets Current liabilities For Fruit Crate Manufacturing Co., Inc., the current ratio for 2006 is: $276,055 = 2.81:1 $98,294 Supposedly, the higher the ratio, the better the company’s abil- ity to pay bills. However, the ratio does not take into account how 182 Performance Measurement Systems CHAPTER 6 FIGURE 6.1 Sample Balance Sheet and Statement of Earnings Fruit Crate Mfg. Co., Inc. Assets 2006 2005 Current Assets Cash and marketable securities $21,285 $20,860 Accounts receivables 83,473 91,155 Inventories 164,482 157,698 Prepaid expenses 2,554 2,049 Accumulated prepaid tax 4,261 3,475 Current assets $276,055 $275,237 Fixed Assets Fixed assets $198,760 $192,666 Less: Accumulated depreciation 107,330 99,030 Net fixed assets $91,430 $93,636 Long-term investment $8,229 $-0- Other Assets Goodwill $23,839 $23,839 Debenture discount 751 833 Other assets $24,590 $24,672 Total Assets $400,304 $393,545 Liabilities and Net Worth 2006 2005 Current Liabilities Bank loans and notes payables $53,638 $42,544 Accounts payable 17,560 16,271 Accrued taxes 4,321 15,186 Other accrued liabilities 22,775 19,608 Current liabilities $98,294 $93,609 Long-term debt $75,562 $74,262 Stockholders’ equity Common stock @ $1 par value $50,420 $50,420 Capital surplus 43,179 43,016 Retained earnings 132,849 132,238 Total stockholders’ equity $226,448 $225,674 Total Liabilities and Net Worth $400,304 $393,545 ...