Purpose: The purpose of a financial ratio analysis is to explain the changes on the financial statements using ratio analysis supported by the numbers in the financial statements. This interactive web-based financial simulation will reinforce your understanding of financial ratios using a real world exercise. This case explores six hypothetical business decisions that managers at Dell Computer might make and each decision’s impact on the financial statements and resulting financial ratios.
- CLICK HERE: http://www.mhhe.com/business/finance/interactivefinsims/ratios/content.html
- Read the INSTRUCTIONS.
- Review the BASE STATEMENTS and scroll over the red arrows to reveal descriptions of the ratios in more detail.
- Click on each of the six business decisions for a detailed description.
- Review the REVISED STATEMENTS to understand the decision’s impact on the statements.
- Answer each of the "quiz" questions in relation to the six business decisions. Refer back to the revised statements as needed. While these questions are not graded, they will aid you in preparing your case analysis (see below).
CASE ANALYSIS: Select ONE of the six hypothetical business decisions and using the attached rubric, analyze the decision and its impact on the related financial statements and overall organization using the financial ratios from Chapter 3 (not necessarily the ratios inside the assignment). There is no minimum number of words; rather, use the grading rubric to be certain you are comprehensive in your analysis.
- Complete the revised ratios after the business decision to determine which ratios are affected the most.
- Be sure to select the important ratios affected by the business decision, calculate the ratios and the change in the numbers and the ratio between the base statements and the revised statements.
- Incorporate those ratios (base and revised) into your case analysis to demonstrate your point(s). Support the changes in the ratio by explaining WHY they increased/decreased. What specifically on the balance sheet or income statement caused the change? Do not include your opinion. A financial analysis should only address facts: what you know to be true. "I think sales dropped because..." is not appropriate in a financial analysis.
- Include percent increases/decreases to benchmark your measurements as to what changes are significant or insignificant. (Review this formula from previous courses if necessary: "NO/O" formula = (New value - Original Value) / Original Value = Percent Increase/Decrease.
BE SURE TO:
- Embed the financial ratios into the narrative. Tables are great tools, but they shouldn’t “tell” the story; the narrative (paragraph form) does that.
- Label all ratios appropriately: times or “X” or with a %. Numbers, if currency, must be labeled with a $.
- All numbers greater than 999 MUST have commas in the appropriate places.
- If numbers are stated in thousands, then you must state that. If I see a number, $45,000 then I assume it’s forty-five thousand, but the tables are in 000’s so the number is really $45 million.
- If a ratio increased from 50% to 60%, the increase is represented as 10 (percentage) points for an increase of 20% (50-60/50). It’s NOT a 10% increase.
- PROOFREAD, PROOFREAD, PROOFREAD: Some of the basic writing errors are improper pronoun/antecedent agreement, misuse of punctuation especially commas and apostrophes, random verb tense changes that are without cause or reason, proper nouns that are not capitalized and common nouns that are capitalized. Please pay close attention to your writing quality and use the Writing Center or the polishmywriting.com website.
- All written assignments should follow APA guidelines. Click here for APA resources.
"Sales for Company X increased from $1.2 million to $1.6 million which represents a 33% growth rate. The rise in sales is largely attributed to expanding sales in Asia. Concurrently, accounts receivable and inventory kept pace with the rise in sales increasing from $600,000 to $800,000 (33% increase) and from $900,000 to $1.1 million (22% increase), respectively. This increase in current assets was necessary to support the sales growth. As a result, the current ratio remained strong at 1.3X versus the 1.2X reported last year while the quick ratio stayed flat at 0.86X."
This is an exercise in writing, critical thinking, and financial analysis using the concepts from Chapter 3. Part of the grading rubric is the quality of your writing so please proofread carefully and pay close attention to proper grammar, spelling, and punctuation.
If you experience technical problems in accessing the interactive website, please make certain you have the most recent versions of Adobe Reader and Adobe Flashplayer.
Complexity: The case is moderately complex. It should require 1-1½ hours.