Jim Connor is the owner of Wave Riders, a surf shop located in West Palm Beach, Florida. Jim has just received his end of of the year financial statements from his accountant. When he sees his gross and net income he is dismayed. With almost $250,000 in gross profit he just doesn't understand why he is always short on cash to pay his employees and suppliers. One of his largest suppliers of surf boards notified him just last month that they would no longer extend him credit and he would have to pre-pay all of his orders. He puts a call into his accountant to set up a meeting with her to discuss the financial health of his business.

Questions

Part 1

1. Using the financial statements provided, calculate the 12 financial ratios discussed in your text using the financial information that is provided below for Wave Riders
2. Looking at these ratios, are there any of them that look suspicious? If so, which ratios are they and what about them do you believe is cause for concern?

Part 2

1. Using the industry ratios you have been provided, compare Wave Rider's ratios with those for the industry. What "red flags" do you see when making this comparison?
2. What do you think might be causing the deviations that you see between Wave Riders ratios and the industry ratios?

Part 3

1. What recommendations would you make to Jim to help him improve the financial performance of Wave Riders in the future? Draw up a memo to Jim outlining your recommendations, making certain to include your reasons for the recommendation (i.e. ratio analysis and/or comparison to industry ratios