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Question #6 Your new Chief Financial Officer is concerned about the Company’s Current Ratio. She asks...

Question #6 Your new Chief Financial Officer is concerned about the Company’s Current Ratio. She asks you to do a detailed analysis. Required: How would you complete this assignment? Specifically,

a) How would you calculate the ratio?

b) What would you compare the ratio to?

c) What SPECIFIC accounts would you research?

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Answer #1

In order to perform a detailed analysis, following information to be collected:-

a) The Ratio will be calculated as follows:- CurrentRatio = Current Assets ÷ Current Liabilities

b) This Ratio is to be compared with company's previous year's ratio, in order to check company's performance with itself, and also be compared with the Industry's Ratio, in order to compute company's performance in the industry.

c) For calculating Current Ratio, one needs all such balances that pervails in the Balance Sheet under Current Assets and Current Liabilities, such as Account Receivable, Inventory, Cash and Cash Equivalent, Prepaid Expenses, Account Payable, Short Term Loans, Other Liabilities etc.

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