Comment on the purpose and information conveyed by each ratio. What did you learn about ABC Company by reviewing the three ratios? What is your conclusion about the solvency and efficiency of the company?

Assume that ABC Company is a small specialty retail store.

Ratios are relevant when assessed over time or across companies. IBISWorld is a comprehensive resource containing market research and statistics, which can be used to compare ABC Company to the industry and leaders in the industry.

Below is a brief introduction to financial ratios using IBISWorld and screenshots that provide guidance for accessing IBISWorld via the Trident library.

Required

Part 1

First, choose three ratios from the background materials. ABC is a simple organization (see balance sheet in case), so pick ratios for which sufficient financial data is available. Verify that at least one of the ratios is included in the IBISWorld database.

Identify the name of the ratio, the formula, and show your computations.

Part 2

Next, respond to the following questions.

Comment on the purpose and information conveyed by each ratio.
What did you learn about ABC Company by reviewing the three ratios?
What is your conclusion about the solvency and efficiency of the company?
How successful is ABC Company relative to the industry average and leaders in the small specialty retail store industry? Write two paragraphs or more for this question. Refer to an actual ratio found in the IBISWorld database to support your conclusion.
A suggested approach to the assignment:

Step 1

Watch the brief introduction to financial ratios using IBISWorld as suggested.

Step 2

Access the IBISWorld database in the Trident library. See screenshots on this page for guidance.

Step 3

Choose three ratios from the background materials for which information is available in the ABC Company’s balance sheet. Make sure at least one of the ratios is included in the IBISWorld database.

A General Example Not Using to ABC Company data.

EFG is a business with $42,000 of current assets and $40,000 of current liabilities. Therefore, the current ratio is:

Current ratio = current assets / current liabilities
Current ratio = $42,000 / $40,000
Current ratio = 1.05 (or 1.05 to 1 or 1.05:1)

EFG’s current ratio of 1.05 may be small or large depending on the industry. For example, which factors should be considered in interpreting the ratio?

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