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# The purpose of this SLP is to apply ratio analysis to assess the financial health of ABC Company. Use the balance sheet presented in the case during this module to compute solvency and efficiency ratios. Compute three

Module 2 – SLP

THE BALANCE SHEET

Before you start the assignment, test your understanding of concepts covered in the assignment. It is not a graded quiz, but a tool for reviewing some key points. The tool can be used multiple times.

The purpose of this SLP is to apply ratio analysis to assess the financial health of ABC Company. Use the balance sheet presented in the case during this module to compute solvency and efficiency ratios. Compute three ratios based on balance sheet accounts for which you have sufficient information.

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.

1. Comment on the purpose and information conveyed by each ratio.
2. What did you learn about ABC Company by reviewing the three ratios?
3. What is your conclusion about the solvency and efficiency of the company?
4. 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?

Step 4

Use data from the module 2 case balance sheet to compute ratios. Identify each ratio and show the computations.

Step 5

Analyze and interpret.

Step 6

Locate at least one of the industry ratios computed above in the IBISWorld database to make a comparison to the ABC Company.

Step 2

Step 3

Step 4

Step 5

This short presentation provides the same information as above.

SLP Assignment Expectations

Identify three balance sheet ratios. Use numbers from ABC’s balance sheet. Show the formula and computations.

• The use of IBISWorld database is required (found in the Trident library).
• Three to five sentences are sufficient to respond to questions 1 to 3 in the second part. Do not use an essay format.
• The use of IBISWorld is a requirement for question 4. Refer to at least one actual ratio and write a minimum of two paragraphs.

Show sources when appropriate. APA format is suggested but not required.

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