Accounting for Business

ACCOUNTING FOR BUSINESS
STUDENT ID:
[Pick the date]

PART A
a) 1) Current Ratio – This is reflective of the current liquidity and the ease with which the
company can settle the outstanding current liabilities.
Formula used
Working
2) Quick Ratio: This is also reflective of the current liquidity but provides a more stringent
measure of the same as inventory is excluded from the list of liquid assets used for settling
the current liabilities.
Short Formula used
Working
3) Accounts Receivable Turnover – This is reflective of operational efficiency and in
particular the ease with which the company recovers outstanding cash from debtors created
on account of credit sales.
Formula used
2

Working
4) Inventory Turnover – This is reflective of operational efficiency and in particular the ease
with which the company converts outstanding inventory into sales to customers.
Formula used
Working
b) The short term liquidity position of the company is represented with the use of current and
quick ratio, Comparing the current ratio in 2019 with the corresponding figure in 2018, it
is apparent that there is sizable drop which implies worsening liquidity position. But, there
is also a positive trend as the current ration in 2019 is higher than corresponding value in
2018. However, the actual ratios in 2019 do not reflect any liquidity threat in the near term
as enough coverage is available for meeting the current liabilities (Watson and Head,
2015).
The operational efficiency of the company is represented with the use of turnover ratios. In
context of both turnover ratios computed for the company, 2019 indicates a marked
improvement over the performance in 2018. But despite this stellar improvement, the
operational performance of the company poses grave risks to working capital. This is
because the credit period as stated by the company is 30 days but the average collection
period in 2019 continues to be higher. Also, the days required to turn inventory into sales
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