and 13.3. In the chapter, we calculate selected ratios for 2008. a. Calculate th

Question

and 13.3. In the chapter, we calculate selected ratios for 2008.

a. Calculate the business's financial ratios for 2007. Assume that Park Ridge
had $18,000 in lease payments in 2007. (Use the ratio analysis discussion to
identify the applicable ratios.)

b. Interpret the ratios. For the analysis, assume that the industry average data
presented in the ratio analysis section is valid for 2007.

13.1 Home- ents of Flows Ended er 31, 07 (in ands) LE 2008 2007 Cash Flows from Operating Activities: Cash received from patient services Cash paid to employees and suppliers Interest paid Interest earned $3.783 (3,684) (16) 13 $ 96 $2,590 (2,541) (14) 6 $ 41 Net cash from operations Cash Flows from Investing Activities: S 25) ($ 25) $ 19) S 19) Purchase of property and equipment Net cash from investing activities Cash Flows from Financing Activities: Securities purchases Contributions Repayment of long-term debt $ 35) $ 15) 10 (13) $ 33 $ 41 0 Net cash from financing activities $ 38) ($ 9) Net increase (decrease) in cash and equivalents Cash and equivalents, beginning of year Cash and equivalents, end of year $ 13 $ 28 $ 41 $ 74

Explanation / Answer

Ratios are important components to assess the financial position of a business.

As indicated, we are assuming that the data for the year 2007 is an industry average.

Now the important business ratios are as follows :

Current Ratio = Current Assets/Current Liability

For the year it is

= 975/549 = 1.77

Industry Average is = 676/371 = 1.82

Current ratio basically indicates the degree of safety enjoyed by short term creditors in terms of employing their money into the business. Current ratio being more than 1 is generally considered good. Hence, the company is doing well. But on an industry average, it is lagging behind a bit.

Quick Ratio = Current Assets – Inventories/Current Liability

= 975-27/ 549 = 1.72

Industry Average = 676-22/371 = 1.76

Quick ratio basically measure the liquidity of the business. In other words, it assess the company’s ability to meet its short term obligations. Inventory is subtracted from Current Assets because inventory is not a liquid asset. Here, company quick ratio is good but could have been better when compared with industry average.

Operating Ratio = Operating Cost/Net Sales *100

Operating cost basically refers to the direct cost involved in the running of operation :

= 3929/4069 = 96.55 %

Industry Average = 2648/2719 =97.38%.

Operating ratio denotes the operational efficiency of the business. The lower it is, the better it is for the company. Here, the company’s operating ratio is better than industry average, hence, we can conclude that it is doing well on operational front.

Net Profit Ratio = Net Profit /Net Sales*100

= 163/4069*100 = 4%

Industry Average = 99/2719 = 3.64%

Net Profit Ratio measures the overall profitability of the business as Net profit is derived after accounting for all the possible costs in relation to revenue earned. Hence, the higher this ratio, the better it is as it indicates higher profitability of the business and better returns to the stockholders.Here, the profitability ratio is little above than industry average thereby showing impressive returns.

Receivable Turnover Ratio = Sales / Average Receivables

Average receivable = Opening receivable + Ending receivable/2

But we are taking ending receivable as average receivable for facilitating comparison.   

= 4042/727 = 5.55 times

Industry Average = 2719/476 = 5.71

Receivable turnover ratio basically shows how many times receivables are converted into cash in a year. Since it is almost equivalent to industry average, hence we can conclude that receivable management is reasonably good.

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