Question

Ratio analysis is a very important part, for example, of credit-making decisions which banks or lenders use in deciding whether to grant loans to third parties or not.

Current Assets	$200,000	$200,000
Current Liabilities	$25,000 ($5,000+$20,000)	$292,000 ($287,000+$5,000)
Long term liabilities	$267,000 (287,000-$20,000	$0
Debt Ratio	8 ($200,000/$25,000)	0.68 ($200,000/$292,000)

above Correct way Raffie’s bookkeepers way

What affect does classifying the entire amount of the mortgage as a current liability have on the calculation, for example, of the current ratio or working capital for Raffie's Kids?

Answer 1

The ratio analysis plays a very important role in the decision making process be it the owners about the performance of the company or the third parties about a variety of issues ranging from supply of materials to issue of loans

Here mortgage which is a long term liability is classified as current liability. this is decrease the current ratio drastically.this current ratio will be useful to understand the liquidity of the company its ability to pay short term liabilities

With such a weak current ratio the lenders will not be enthusiastic to provide short term loans to the company as they consider liquidity position is not good due to wrongful inclusion of mortgage in current liabilities.

Working capital of the company will be drastically low thus hampering the daily operations of the company.