ASSIGNMENT MODULE 6:

PROBLEM SOLVING EXERCISE (Case Study)

WORKING CAPITAL FINANCIAL RATIO ANALYSIS SPREAD SHEET

Motorola Motorola
Company computed
Financial SIGNIFICANCE FORMULA Ratio Interpretation Evaluation
Ratio (Sample)

1) Current measures a firm’s Current Ratio = Given: The higher the current Favorable-
Ratio ability to pay off its Current Assets / ratio, the more liquid
short-term liabilities Current Liabilities CA = 17,134 CR the company is. that means
with its current CL = 9,705 Commonly acceptable the company
= 17,134 / can more
assets. It is current ratio is 2; it's a
important measure CR =? 9,705 comfortable financial easily make
of liquidity because = 1.765482 position for most current debt
short-term liabilities enterprises. For most payments and
or 177%
are due within the industrial companies, the company
next year. 1.5 may be an is good short-
acceptable current term financial
ratio.
strength.
Low values for the
current ratio (values
less than 1) indicate
that a firm may have
difficulty meeting
current obligations.

2) Acid Test measures the Acid Ratio = Given: The higher the quick Favorable-
Ratio ability of a Liquid Assets / ratio, the better the
company to pay its Current Liabilities AC position of the that means
current liabilities the company
LA = = 11,003 / company. The
when they come has more
6,507+59+4 commonly acceptable
due with only quick 9,705 quick assets
,437 current ratio is 1, but than current
assets.
CL = 9,705 = 1.133745 may vary from industry liabilities.
or 113% to industry. A company
AC =? with a quick ratio of
less than 1 cannot
currently pay back its
current liabilities; it's
the bad sign for
investors and partners.

3) Cash measures a firm’s Cash Position Given: Cash ratio is not as Favorable-
Position ability to pay off its Ratio = [(cash & popular in financial that means a
Ratio current liabilities Bank) + short- CPR analysis as current or company’s 0.6
with only cash and term securities] / quick ratios, its is considered
Cash = = 6,566 /
cash equivalents. Current Liabilities usefulness is limited. acceptable.
6,507 9,705
There is no common
Short term = = 0.676558 norm for cash ratio. In
59 some countries a cash
or 68%
ratio of not less than
CL = 9,705
0.2 is considered as
acceptable. But ratio
that are too high may
CPR =? show poor asset
utilization for a
company holding large
amounts of cash on its
balance sheet.

4) Inventory Measures how Inventory Given: The higher the Favorable-

turnover many times turnover Ratio = inventory turnover, the that means a
Ratio average inventory Cost of Goods ITR better, since high company
is “turned” or sold Sold / Average Cost of = 17, 938 / inventory turnover turnover ratio
during a period. In Goods Sold 2,869 typically means is 6.25 that
other words, it Inventory at Cost = 17, 938 a company is selling indicates good
measures how = 6.25 or goods quickly, and inventory
many times a IAT = 2,869 625% there is considerable turnover ratio
company sold its demand for their
total average products.
inventory dollar Low inventory
ITR =?
amount during the turnover, on the other
year. hand, would likely
indicate weaker sales
and declining demand
for a company’s
products.