Accounting for Business

Running Head: ACCOUNTING FOR BUSINESS 1
Accounting for Business
[Name of Writer]
[Name of Institution]

ACCOUNTING FOR BUSINESS 2
Part A
a.
The ratios are used as a tool to measure various aspects of a business. They help a
stakeholder take best decision in the given circumstances. The following table shows the
calculation of ratios:
Financial Item 2019 2018 2017 Avg
2018
Avg
2019
Net credit sales
630,000 490,000
Cost of goods sold
290,000 250,000
Cash
18,000 12,000
Accounts receivable
70,000 60,000 78,000 69,000 65,000
Inventory
130,000 150,000 130,000 140,000 140,000
Current liabilities
105,000 81,000
Ratio
Current Ratio 2.08 2.74
Quick Ratio 0.84 0.89
Accounts receivable
turnover (Times)
9.69 7.10
Accounts receivable
turnover (Days)
38 51
Inventory Turnover
(Times)
2.07 3.62
Inventory Turnover
(Days)
176 204
a. Current Ratio
The current ratio is an analysis of the ability of a company to pay back the current
liabilities using the current Assets. It reveals the company’s ability to pay back short-term
liabilities. The current ratio of Green Apple Ltd was 2.74:1 in 2018 and it decreased slightly in
2019 and was 2.08:1. The current ratio of 1:1 is considered fine. However, this company is a
service-based company, quick ratio will further elaborate the liquidity of Green Apple Ltd
(Gaiardelli, Saccani & Songini, 2007).

ACCOUNTING FOR BUSINESS 3
Quick Ratio
The Quick Ratio takes only liquid assets, that is the assets those are quickly convertible
into cash, into account. That is to closely analyze the ability of a company to pay back its short-
term liabilities. The quick ratio of Green Apple Ltd was 0.89:1 in 2018 and it fell to 0.84:1 in
2019, The reason for fall of both quick ratio and current ratio is the overall fall in the current
assets from 2018 to 2019. The current assets in 2019 were $4000 less than the current assets of
2018. Whereas the current liabilities rose by $24,000. Hence, both quick and current ratio fell.
Accounts Receivable Turnover
The Accounts receivable turnover means the time taken by the company’s receivables to
pay what they owe to the Green Apple Ltd (Mendoza, 2015). In 2018 the Accounts receivable
turnover was 51 days. Which was very high as compared to normally allowed period to pay off
was 30 days. The company improved its collection probably by strict credit policies, to 38 days.
This is still higher than what ideal turnover should be.
Inventory Turnover
The Inventory turnover reveals how many days a company takes to convert the inventory
bought into sales. The inventory turnover of the service industry is generally higher as they do
not have any merchandise to sell. The inventory turnover of Green Bell Ltd was 204 days in
2018 and it improved and was 176 days in 2019. However, in both years the inventory turnover
of Green Apple Ltd was 103 days higher in 2018 and 75 days higher in 2019. The Green Apple
Ltd must work on their Cost of goods sold as despite the reduction of $20,000 from 2018 to
2019; the cost of goods sold has increased by $40,000.
b. Short Term Solvency and Efficiency of Business
Solvency is defined as the ability of a company to pay back its long-term obligations
(Iyer, Puri & Ryan, 2016). The term short term solvency means the liquidity of a company. The
liquidity is the ability of a company to pay back its short-term obligation. The short-term
solvency of Green Apple Ltd seems to be fine in terms of current ratio. However, the quick ratio
is less than 1:1 which is because of too much tied in inventory and mismanagement of inventory
by Green Apple Ltd.
The efficiency of the business means its ability to make best possible use of the available
resources (Neacsu, 2015). Efficient businesses reduce costs and increase output without any
change in the resources at hand. The efficiency of Green Apple Ltd is measured by the inventory