Assignment

This assignment requires you to investigate financial statements.

Read the following scenario adopted from course textbook:

Potz and pans, a small shop, has current assets of $45,000 (including inventory valued at $30,000) and $9000 in current liabilities. WannaBees, a specialty clothing store, has current assets of $150,000 (including inventory valued at $125,000) and $85,000 in current liabilities. Both businesses are seeking loans.

Use the information in the scenario in the bold and italic above to complete the assignment.

You have been allotted two weeks to complete this assignment. It is strongly recommended that you begin to work through the assignment during Week 11 to enable you to ask questions of your professor as needed.

Action Items

Use the information in the scenario found in the Overview and information in your textbook to answer the following questions and complete the required calculations. For questions a and b, go to www.bankrate.com. Click on the Calculators box on the toolbar, then click on small business to answer these questions.

Calculate the current ratio for each company. Which company is more likely to get the loan? Why?

The acid-test ratio subtracts the value of the firm's inventory from its total current assets. It is a more reliable measure of business's ability to repay loans that the current ratio. This is so because inventory is often difficult to sell. Calculate the acid-test ratio for each business and decide whether you would give either the loan. Why or why not?

What value do financial ratios offer ivestors in reviewing the financial performance of a firm? Why is it important to remember that financial ratios can differ from industy to industry?

As a potential investor in a firm or even a buyer of a particulate business, would it be advisable for you to buy evaluate the company's financial statements? Why or why not? What key information would you seek from a firm's financial statements?

What are the primary sources of short-term funds for new business owners? What are their major sources of long-term funds?

Why does a finance manager need to understand accounting information even when the firm has a trained accountant on its staff?

Support your answer with information from course textbook.