Competency In Microsoft Excel overview from microso ✓ Solved

Week 5 Assignment 2 - Competency in Microsoft Excel Overview From Microsoft Excel for Accounting: Once you have prepared the financial statements, use Excel to perform a ratio analysis as instructed below and write a memo analyzing the company’s financial position. You must use Excel formulas to compute the ratios and totals on the financial statements where applicable. Points will be deducted if you do not use formulas for your calculations.

Instructions Part I: Using the data from your balance sheet, statement of owner’s equity, and income statement, perform the following ratio analyses:

  • Current ratio.

  • Quick ratio.

  • Debt ratio.

  • Equity ratio.

  • Debt-to-equity ratio.

  • Profit margin ratio.

Submit one Excel workbook for Part I with each financial statement on a separate tab. Put the financial ratios on a separate tab. Label each tab accordingly.

Part II: Write a 2–3 page memo analyzing the company’s financial position based on the financial statement results and ratio calculations performed in Part I. In your summary, discuss the following:

  • Whether the firm is financially strong.

  • What they have more of (assets or liabilities).

  • Whether or not they are generating income.

  • The results of their financial ratios.

  • Whether or not you would invest in this company.

The memo will be submitted electronically as a Microsoft Word document.

Paper For Above Instructions

To analyze the financial position of Frozen Fractals Corp based on the financial statements provided, various ratios from the financial data will be calculated and discussed. The analysis aims to ascertain the company's strength in terms of financial health, asset and liability balance, income generation capabilities, overall results of financial ratios, and the advisability of potential investment.

Financial Ratios Overview

To provide a quantitative basis for assessing Frozen Fractals Corp's financial health, various key ratios will be computed using the data from the income statement, statement of owner's equity, and balance sheet. The results will help understand where the company stands financially.

Current Ratio

The current ratio is calculated by dividing current assets by current liabilities. In this case, the total assets are $100,100 and with liabilities of $6,000, the formula is:

Current Ratio = Current Assets / Current Liabilities

Here, assuming cash and accounts receivable are current assets, we have:

Current Ratio = $65,100 / $6,000 = 10.85

A current ratio above 1 indicates that the company has sufficient assets to cover its current obligations, portraying a solid short-term financial position.

Quick Ratio

The quick ratio is computed by dividing the sum of cash, cash equivalents, and accounts receivable by current liabilities, thereby measuring the company’s ability to meet its short-term liabilities without relying on inventory sales.

The calculation is:

Quick Ratio = (Cash + Accounts Receivable) / Current Liabilities

Quick Ratio = ($61,000 + $4,100) / $6,000 = 10.85

This result, similar to the current ratio, is strong and suggests that the company can pay off its short-term liabilities quickly.

Debt Ratio

The debt ratio measures the company's total liabilities against its total assets, providing a clue about leverage and risk. It is calculated as follows:

Debt Ratio = Total Liabilities / Total Assets

Debt Ratio = $6,000 / $100,100 = 0.0599

A low debt ratio signifies less risk since a small proportion of total assets are financed through debt.

Equity Ratio

The equity ratio assesses how much of the company’s assets are financed by shareholders' equity. The formula is:

Equity Ratio = Total Equity / Total Assets

Equity Ratio = $94,100 / $100,100 = 0.9398

This indicates that a significant percentage of the company’s assets are funded by shareholders, signifying a robust equity base.

Debt-to-Equity Ratio

This ratio compares the company's total liabilities to its shareholder equity. It is calculated as:

Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity

Debt-to-Equity Ratio = $6,000 / $94,100 = 0.0637

This is a favorable ratio indicating that for every dollar of equity, the company uses a small amount of debt.

Profit Margin Ratio

This ratio indicates how much profit a company makes for every dollar of sales. It is computed as follows:

Profit Margin Ratio = Net Income / Total Revenue

Profit Margin Ratio = $23,900 / $49,500 = 0.4829

A profit margin above 0.4 is typically considered strong in many industries, suggesting good management and operational efficiency.

Analysis of Financial Position

Based on the calculated ratios, it is evident that Frozen Fractals Corp has a solid footing in its financial performance. The company exhibits a strong liquidity position with both the current and quick ratios above the desirable threshold of 1, suggesting it can cover short-term liabilities easily.

The debt ratio and debt-to-equity ratios are very low, which indicates that Frozen Fractals Corp is not heavily indebted, making it less risky for potential investors. The company has significantly more assets ($100,100) than liabilities ($6,000), signifying a robust asset base.

Importantly, the profit margin indicates that the company is generating substantial income, revealing that the operations are efficient and profitable. Overall, the financial health shown through these ratios indicates a financially strong firm.

Thus, investment in Frozen Fractals Corp appears favorable based on its strong ratios and financial position, suggesting a sound basis for potential growth.

Conclusion

Based on this analysis, Frozen Fractals Corp is a financially strong company. The results of the ratio analysis illustrate a strong liquidity position, low leverage, high equity financing, and good profit margins. Investors can consider it a promising investment opportunity that reflects financial stability and growth potential.

References

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  • Gitman, L. J., & Zutter, C. J. (2015). Principles of Managerial Finance. Pearson Education.

  • Wild, J. J., & Subramanyam, K. R. (2014). Financial Statement Analysis. McGraw-Hill Education.

  • Koller, T., Goedhart, M., & Wessels, D. (2020). Valuation: Measuring and Managing the Value of Companies. Wiley.

  • Penman, S. H. (2016). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.

  • Palepu, K. G., & Healy, P. M. (2013). Business Analysis and Valuation: Using Financial Statements. Cengage Learning.

  • Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.

  • Foster, G. (1986). Financial Statement Analysis. Objectives and Techniques of Analysis. Financial Analysts Journal.

  • White, G. I., Sondhi, A. J., & Fried, D. (2003). The Analysis and Use of Financial Statements. Wiley.

  • Stickney, C. P., & Brown, P. (2004). Financial Reporting and Statement Analysis: A Strategic Perspective. Thomson South-Western.