| Course | AC112 Accounting Fundamentals for Management |
|---|---|
| Unit | Unit 7 |
| Paper type | Ratio interpretation memo |
| Length | About 780 words, 5 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | BS in Accounting |
| Updated | October 2026 |
Free sample paper for AC112 Unit 7
The Ratio a Lender Reads First: A Unit 7 Ratio Interpretation Memo for a Grooming Salon's Credit Line
[Student Name]
Purdue University Global
AC112: Accounting Fundamentals for Management
Unit 7 Ratio Interpretation Memo
[Instructor Name]
[Date]
The salon, its statements and the loan request are composite; the textbook and the ratio studies cited are real.
Header
To: Renata Cole, owner, Sudsy Hound Grooming From: Accounting student consultant Date: July 2 Subject: How the bank will read our numbers for the $10,000 line of credit
Conclusion
A bank considering a short-term line wants to know first whether twelve months of bills can be met from assets the salon already holds, and our current ratio of 2.16 at June 30 shows roughly two dollars available for every dollar coming due. The figure that will draw questions is debt to equity, which rose from 0.42 to 0.69 in one quarter.
The Four Ratios
1. Current ratio, everything due to become cash within a year set against everything due to be paid within a year. March 31: $26,810 divided by $4,960 equals 5.41. June 30: $22,500 divided by $10,413 equals 2.16.
2. Quick ratio, the most liquid assets only, cash and receivables, over current liabilities. March 31: $23,960 divided by $4,960 equals 4.83. June 30: $20,200 divided by $10,413 equals 1.94.
3. Debt to equity, total liabilities divided by owner's equity. March 31: $13,200 divided by $31,310 equals 0.42. June 30: $21,619 divided by $31,281 equals 0.69.
4. Net profit margin, net income divided by revenue. March: $2,810 divided by $10,860 equals 25.9 percent. Second quarter: $8,971 divided by $59,500 equals 15.1 percent.
What Moved Each Ratio
The current ratio fell for two reasons. Cash dropped from $22,500 to $17,100 as the opening investment was spent, and current liabilities more than doubled, mostly because the pickup van loan added $4,443 due within twelve months. Neither is alarming on its own, but the trend is what a lender notices.
The quick ratio tells almost the same story because the salon holds little inventory. Supplies and prepaid insurance are small, so cash and receivables make up most of current assets.
Debt to equity rose because the $9,100 van loan was added while equity stayed nearly flat. Renata withdrew $9,000 over the quarter, roughly what the salon earned, so her claim did not grow.
The margin fell from March's 25.9 percent, but March is a poor comparison. It was a short opening month with few employees. The quarter's 15.1 percent reflects a full staff of groomers paid on commission.
The current ratio helps the application, but the bank will read it beside the debt to equity trend and ask whether a business that has added a loan every quarter is about to add another.
How a Lender Uses These
Ratios have been studied as warning signs for decades. Early work found that measures of cash flow relative to debt and of liquidity separated failing firms from healthy ones years before failure (Beaver, 1966), and later models combined several ratios into a single score (Altman, 1968). A small business lender uses simpler versions of the same logic: can the business pay its short-term bills, and how much of it belongs to the owner rather than to creditors (Franklin et al., 2019).
What a Long-Term Creditor Would Read Instead
A lender financing the planned grooming van over five years would care less about the current ratio and more about whether profit covers interest and principal year after year. That lender would ask for a full year of results and would look closely at the margin and at how much of the profit the owner withdraws.
What the Bank Is Likely to Request
Most lenders reviewing a line of this size ask for more than the statements. Renata should expect requests for the last three months of bank statements, an aging of receivables showing how long the kennel and the veterinary clinic take to pay, a copy of both loan agreements, and her personal financial statement, since a sole proprietor's personal assets usually stand behind the business's debts. The bank may also ask how the line would be used. The honest answer is that it would cover a short gap in late summer, when grooming demand dips and the new van's down payment and first installments arrive together. Being ready with that answer, and with the budget that shows it, will matter more than any single ratio.
Recommendation
Submit the application with the June 30 statements and a one-page note explaining the van loan and the opening-month margin. Hold withdrawals at or below $3,000 a month until the line is approved, so equity grows in the next quarter.
References
Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589-609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x
Beaver, W. H. (1966). Financial ratios as predictors of failure. Journal of Accounting Research, 4, 71-111. https://doi.org/10.2307/2490171
Franklin, M., Graybeal, P., & Cooper, D. (2019). Principles of accounting, volume 1: Financial accounting. OpenStax. https://openstax.org/details/books/principles-financial-accounting
The Purdue Global AC112 Unit 7 instructions
The seventh AC112 unit usually asks for a short memo rather than a page of calculations. Compute the ratios the prompt names, or choose those that answer the reader's question, from the statements supplied. Show each formula, the inputs and the result for each period. Open the memo with the conclusion: which ratio matters most to this reader and what it says. Then explain what moved each ratio, pointing to specific lines on the statements. Distinguish what a short-term lender reads from what a long-term creditor would read. Use a standard memo header with to, from, date and subject. Keep the tone business-formal and the length to one or two pages. A brief citation can support the ratio logic, in APA 7.
How the AC 112 Unit 7 example is put together
The memo carries a standard header for the salon's owner, with a subject line naming the $10,000 line. Its first section gives the conclusion in two sentences. A numbered list shows four ratios, each with its definition, March 31 and June 30 inputs and results. The next section explains the movements: cash spent and a van loan's current portion for liquidity, a loan added while equity stayed flat for the debt reading, and a short opening month for the margin. The highlighted sentence anticipates the lender reading liquidity beside debt to equity. A paragraph cites early ratio research and the Altman score. Sections cover the bank's likely document requests and what a long-term lender would read. Two recommendations close the memo.
Where the points sit in the AC112 Unit 7 rubric
Ratio memos are graded on correct calculations, sound interpretation and a structure that serves the reader. The rubric usually rewards a conclusion stated up front. Each ratio should show its inputs so a grader can check the arithmetic. Interpretation earns more when it names the statement line that moved the ratio rather than repeating the number. Matching the ratios to the lender's question shows judgment. Distinguishing short-term and long-term perspectives often carries points. Memo format, a clear subject line and concise paragraphs count. Recommendations show the analysis leads somewhere. Accuracy, business writing and any APA 7 citations complete the marks.
AC112 Unit 7 help: mistakes that cost points
Ratio memos often bury the conclusion at the end or never state one. Others compute a dozen ratios when the reader needs four. Students sometimes report a ratio's change without saying what caused it. Liquidity and debt measures get mixed up, as when debt to equity is presented as a measure of short-term ability to pay. Memo formatting is skipped in favor of an essay. Inputs are omitted, so errors cannot be traced. If you have two years or two periods of statements and need the memo that reads them for a lender, our writers can prepare it from your figures.
Get an AC112 Unit 7 example written to your instructions
Share the statements your AC112 section supplied for Unit 7, along with its instructions and rubric, and the memo is computed and written from those figures. The first custom sample is free of charge and lands in 24-48h, with the formula shown for every ratio so any result can be checked by hand. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
More AC112 papers and BS in Accounting samples
- AC112 Unit 1: Why Managers Read Entries Post
- AC112 Unit 2: Transaction Analysis Exercise
- AC112 Unit 3: Trial Balance Problem and Note
- AC112 Unit 4: Adjusting Entries Set
- AC112 Unit 5: Financial Statement Preparation
- AC112 Unit 6: Profit Versus Cash Discussion
- AC112 Unit 8: Seminar Reflection
- AC112 Unit 9: Budget Schedule
- AC112 Unit 10: Management Report
AC112 Unit 7 questions, answered
Which ratios belong in the memo if my prompt does not list them?
Ratios that answer the lender's question. For a short-term credit request, liquidity measures such as the current and quick ratios matter most, with debt to equity and a profitability measure for context. Four is usually enough for a one-page memo. Listing ten ratios with a sentence each tends to read as a data dump and dilutes the conclusion.
Should I use ending balances or averages?
Balance sheet ratios like the current ratio use ending figures from a single date. Ratios mixing an income statement figure with a balance sheet figure, such as return on assets, often use an average of the opening and closing balance. AC112 prompts vary on this, so the sample states its choice under the table and applies it consistently across both years.
How formal does the memo need to be?
Business-formal but short. A header, a direct opening, a table and a few paragraphs, with no title page or reference list unless the rubric asks for them. The strongest memos read as though addressed to a busy lender who will take in the first paragraph and glance at the table, and everything after that supports what those two elements already said.
Where can I find a free AC112 Unit 7 sample paper?
The complete AC112 Unit 7 ratio interpretation memo on this page computes four ratios for a grooming salon at two dates and tells the owner which one a bank reads first for a line of credit.
Why did the current ratio fall in the AC112 Unit 7 sample?
Cash fell from $22,500 to $17,100 as the opening investment was spent, and current liabilities more than doubled when a van loan added about $4,443 due within twelve months.