Recommend one ratio to assess a company’s ability to pay current liabilities
Peer $1-Brock,
Recommend one ratio to assess a company’s ability to pay current liabilities (also called liquidity ratios). Explain your choice.
The ratio that I would recommend would be the acid-test ratio. This ratio “tells us whether a company could pay its current liabilities if they came due immediately” (Miller-Nobles & Mattison, 2021). The acid-test adds cash and equivalents, short term investments, net current receivables and divides by total current liabilities.
Recommend one ratio to assess a company’s profitability. Explain your choice.
The one ratio that i would recommend would be the cash flow ratio. The primary reason is because the intent of a business is to make money. To make money, a company has to not only receive profit for services or the selling of inventory, but they also must invest in expanding their company, improving operations, or paying their employees. The cash flow ratio provides a simple yet effective method of determining almost a debt to income ration in dividing cash and cash equivalent by current liabilities. A number too high will show that a company isn’t seeking to improve, and a number too low will show that a company is liability heavy (Miller-Nobles & Mattison, 2021).
Describe a situation in your future professional or personal life where you may need to evaluate a company’s financial performance.
I plan to be a project manager in my next career. A situation in which I may need to evaluate a company’s financial performance would be if they’re intending to expand. As the project manager, I may need to provide a recommendation on if the expansion is a good idea at that time, or determine a healthy cost of the expansion and therefore determine where costs need to be cut.
Miller-Nobles & Mattison. (2021). Horngren’s accounting: The financial chapters (13th ed.). Pearson.
Peer #2-James,
Recommend one ratio to assess a company’s ability to pay current liabilities (also called liquidity ratios). Explain your choice.
I would definitely choose the cash ratio because it “helps to determine a company’s ability to meet its short-term obligations and is calculated as cash plus cash equivalents divided by total current liabilities” (Miller-Nobles/Mattison).
Recommend one ratio to assess a company’s profitability. Explain your choice.
My choice would be the ratio to equity “interest expense is added back to net income to determine the real return on the assets regardless of the corporation’s financing choices (debt or equity)” (Miller-Nobles/Mattison). This method would also be beneficial and shows us how and how much the company has nee profiting.
Describe a situation in your future professional or personal life where you may need to evaluate a company’s financial performance.
Since I am not currently employed, I have been seeking to find a job that will gain myself and my household an additional income. I am currently bringing in money due to my retirement and I would like to learn more about stocks and investing and see what route that takes us. Other than that, I know that my family and I are comfortable but extra money for investing sounds like something I would like to learn about.
Miller-Nobles/Mattison. Horngren’s accounting: The financial chapters (7th ed.). Pearson.
Professors comment:
Analysis
Hi Sonia & All,
In financial statements and tax filings, the absorption cost approach makes more sense from an audit view as it does not give management any choice in shifting costs. This affects some analysis, though, For example, factory depreciation costs are not part of production, and many believe, including me, that when looking at product costs, these should not be considered. While they are a part of the business, including these costs will often lead to bad decision-making. If a product costs 75 and sells for 90, then all else being equal it should be sold. If we, however, include fixed manufacturing overhead in the cost, the item may seem to have a cost of 100 which is above cost, and so it should not be sold. This would be an error as the administrative overhead would remain as a cost, and we would lose the 15 per unit we could earn to offset this cost.
Thoughts/Questions?
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