Accounting for Business

ACCOUNTING FOR
BUSINESS
STUDENT ID:
[Pick the date]

PART A
a) 1) Current Ratio – This is deployed a short term liquidity indicator and highlights the
extent to which company can settle current liabilities.
Formula used
Working
2) Quick Ratio: This also measures liquidity in short term but does not include inventories as
it cannot be converted into cash readily.
Formula used
Working
3) Accounts Receivable Turnover – It highlights the ability of the company to derive cash
from debtors in a timely manner. A lower receivables collection period is considered to be
preferable.
Formula used
2

Working
4) Inventory Turnover – It indicates the company’s ability to convert the inventory into sales.
A lower inventory turnover days is considered to be preferable.
Formula used
Inventory Turnover ሺin timesሻ= Cost of Goods Sold
Avgerage inventory
Inventory Days = ൬ 365
Inventory Turnover൰
Working
b) Short Term Liquidity – The relevant measures for this are quick ratio and current ratio. In
2019, a decline in the current ratio has been observed which is sizable in quantum. Even
though, a marginal improvement in quick ratio is seen in 2019, but overall there is adverse
performance in terms of short term liquidity in 2019 when compared to 2018. Since the
absolute values of the two ratios in 2019 are healthy despite the decline, thus this aspect is
not worrisome provided this trend does not continue going forward (Berk et. al., 2016).
Efficiency Ratio – If the given two efficiency ratios are compared between 2018 and 2019,
it can be concluded that the company has seen significant improvement in efficiency
during this period. However, even after considering the improved performance, there are
key concerns which remain unaddressed. The collection period on average in 2019 is
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