Managers use ratio analysis to identify situations needing attention; potential leaders use financial analysis to determine whether a company is creditworthy; and stockholders use ratio analysis to help predict future earnings, dividends, and free cash flow.

b.) The 2011 current ratio is calculated by using the following formula:

current assets/current liabilities= 2,680,112/1,039,800= 2.58:1

The 2011 quick ratio is calculated by using the following formula:

current assets-inventories/current liabilities=2,680,112-1,716,480/1,039,800=.93:1

The higher the current ratio the better the company’s liquidity because it provides insight about a firm's ability to meet its short-term financial obligations; therefore after calculating the 2009, 2010, and projected 2011 current ratio using the current assets/current liabilities formula we find the following ratios:

2009: 1,124,000/481,600=2.33:1

2010: 1,946,802/1,328,960=1.46:1

projected 2011: 2,680,112/1,039,800=2.58:1

The projected 2011 balance sheet leads us to believe that the year 2011 will have more liquidity than in the previous 2 years.

Ratios are very useful to managers, bankers and stockholders for various reasons. Liquidity ratios would have possibly a different impact on these analysts. Short-term creditors, such as bankers, prefer a high current ratio (type of liquidity ratio) since it reduces their risk of letting a company borrow money. Stockholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business. Managers can use the liquidity ratio to...