Acct II Final - Acme Construction Financial Analyis

ACCT II

Final Exam

ACME CONSTRUCTION FINANCIAL ANALYIS

In reviewing the Balance and Income Statements made on ACME Construction, you need to understand the information contained in their financial statements, we must view them to know the strength or weaknesses of this company to make forecast about their future prospects. Thereby enabling us to take the financial analyst to show ACME different decisions making processes regarding the operations of the company, you find many things that might cause concern. Over the last three years there has been a big fluctuation in many of the accounts; overall cash is low, inventory is high, and sales are increasing; but so is the Cost of Goods Sold (COGS) which decreases the Gross Profit.

In this analysis, I want to show ACME's short comings and where they can improve to better their financial standings. From the common sizing and ratios we can see the values and how they relate to how a company has performed in the past three years, and might perform in the future. Ratios will help define the relationships between individual values and relate them to how a company has performed in the past as well how they might perform in the future.

Reviewing this company's current asset ratios, for the last three years, we find a positive pattern of paying off short-term debts. According to ACME's current asset ratio, we see an increase thru all three years from 2007 to 2008 there was a 73 percent increase, and from 2008 and 2009 it almost doubled at 131.5 percent increase. With the increase of each of these years it shows that ACME remained responsible of their debts and paid back money owed. Records show that current liabilities decrease each year even though total assets percentages went up and down. With Common Sizing we can see the growth in assets and the decrease in liabilities but rations so a clearer picture.

The acid-test ratio also called quick ratio reflects how ACME is able to handle short-term liquid assets. The increase in this ratio shows that they are far above normal ratio. This might be to maintaining a high cash account. When we look at the difference between the three years we see an increase each year, 2007 to 2008 there's an increase of 36.63:1 difference, and 2008 to 2009 there was also an increase in this ratio with 17.42:1 difference. From common sizing we see a decrease in cash and in liabilities even with the lesser amount of cash a positive is the low debt and the ability to eliminate current debts.

There is a poor showing in liquidity using the inventory turnover ratio formula. This company had a decrease in inventory turnover between 2008 and 2009; ACME shows a decrease from 1.7407 to .8624. During this time frame the company suffered an increase in the cost of goods sold of 20 percent, during this same time they also had an increase in their total inventory of 66 percent. These two drastic increases in these area further help to explain why there was such a significant change in the inventory turnover ratio. It could also be a chance that during this time ACME was in the process of stockpiling inventory for later use which increased. This situation could also be caused due to the work in progress that ACME has occurring during the years evaluated in the analysis.

The acid-test ratio will show if ACME is able to settle its current debts with its most liquid assets. Looking at the difference between 2007 and 2008 you can see an increase of 36.63 percent, between 2008 and 2009 there was an increase in the ratios of 17.42 percent. Although the increase was greater in the first two years, ACME is still showing their ability to eliminate current debts with its most liquid assets. It can be assumed that the reason for the acid-test ratio's rapid increase is the fact that ACME never has any receivables. This would lead one to believe that all clients working with ACME pays what is owed in at the time of billing, resulting in the company collecting on work in