In establishing a multiyear financial plan, tools such as the balance sheet, income statement and cash flow statements are necessary. This section of the paper seeks to analyze the financial statements from Charlottesville city for the financial years 2005 and 2006. The two-year analysis of the comparison of ratios is made on the measures of liquidity, long-term solvency, and asset management ratios using data from the following table.
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Financial Statement for the City of Charlottesville
|Current ratio||Current assets/current liabilities||(1,289,762/248,695)=5.19||(97,528,485/11,074,054)= 8.81|
|Working capital||Current assets –current liabilities||(1,289,762-248695)= 1,041,067||(97,528,485-11, |
|Quick ratio||Quick assets/current liabilities||(1,121,492/248,695)=4.51||(67,889,390/11,074,054)=6.13|
|Debt to asset ratio||Total liabilities/total assets||(630,153/3,676,115)=0.17||(40,014,863/108,773,819)=0.367|
|Days payable ratio||All accounts payable *365 days/NPS expenses||(73,000,000/1,161,884)=62.83 days||(5,561,480*365)/38,226,670.5 =53.10 days|
|Profit margin ratio||Surplus/revenue||(-2,037/3,822,766)= -0.053%||(-18,166,951/ 172,966,402) = -10.5%|
|Common size ratio||Line item amount/total amount |
|Line item amount/total amount |
The liquidity ratio of a company shows the agency’s working capital position. The liquidity ratio determines whether a company has enough assets to cater for all the short-term debts (Kwok, Milevsky, & Robinson, 1994). To determine the liquidity of Charlottesville city for the financial years 2005 and 2006, we will study the current ratio and the quick ratio.
Current Ratio (CR)
The current ratio is the proportion between current assets available and the current liabilities. In FY2005, a current ratio of 8.81 is recorded, whereas, FY 2006 records a current ratio of 5.19. This means that FY2005 is in a better financial position as compared to FY2006 since it has more current assets to pay for short-term debt. A higher current ratio indicates a better financial position as the company has enough money to meet the operating costs.
The quick ratio is a refined liquidity indicator. It measures the amount of the liquid current asset about the current liabilities (Taylor, 2005). The quick ratio measure is a somewhat better measure of the liquidity of a company as it excludes inventories. A higher quick ratio shows a higher liquid current position. The FY2005 indicates a higher quick ratio of 6.13 as compared to FY2006 whose quick ratio is 4.51. Therefore, FY2005 is in a higher liquid position as compared to FY2006.
The working capital is the operating liquidity or rather, the operating capital of a government entity. A government entity of an organization would have highly valued assets and high profitability but short of liquidity. Proper management of working capital is the management of accounts receivables, inventories, and cash at hand. In comparing the two financial years of Charlottesville city, FY2005 has working capital of $86,454,431, which surpasses the working capital of $1,041,067 for the FY2006.
Solvency ratios are used to measure the ability of the agency to meet long-term obligations. This measure is so important to loan providers as it shows the likelihood and the capability of a company to pay long-term debts (Taylor, 2005). The Charlottesville city solvency ratio is measured using the debt-to-asset ratio, where the total liabilities are compared to the total assets. FY2005 records a debt-to-asset ratio of 0.367, more than twice the debt-to-asset ratio of 0.17 recorded in FY2006.
Asset Management Ratios
Asset management ratios give an insight into the level of success of a firm’s credit policy and in inventory management (Michael, 2009). The Charlottesville asset management ratios are done using the day’s payable ratios. In that case, FY2005 records 53.10 days while FY2006 records an average of 62.83 days. The days’ payable indicates the average number of days the firm needs to pay his creditors. In essence, the higher the number of days, the better for the agency since it will have enough time to collect the monies needed.
Kwok, H., Milevsky, M., & Robinson, C. (1994). Asset Allocation, Life Expectancy, and Shortfall. Financial Services Review, 3(2), 109-126.
Michael, G. (2009). House Budget Committee. The 2009 Future Years Defense Program: Implications and Alternatives, 2(3), 111-116.
Taylor, D. (2005). Financial Planning: Process and Environment. Bryn Mawr, PA: The American College Press.