Unit 5-Introduction to Accounting M2

Working capital is the money that a company has after paying off its current liabilities and with which it can finance its operating and working capital requirements. The higher a number the better a company is able to pay off its debt and have cash for meeting its financial obligations. The current ratio is used to gauge a company 's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. The current ratio denotes the efficiency of a company 's operating cycle or its ability to turn its products into cash, which is a key requirement for business success. Quick ratio is an indicator of a company 's short-term liquidity. The quick ratio measures a company 's ability to meet its short-term obligations with its most liquid assets, essentially cash and cash equivalents. The higher the quick ratio, the better the financial position of the company in terms of its ability to meet its liabilities.

Debtor’s collection period shows the link between the number of debtors and how long on average it takes the business to collect debts.

Liquidity is a financial term used to determine the ability of a company to pay off its short-term debts, which will be due within the next year or in an operating cycle. In another word, liquidity is a very important indicator to evaluate a company’s financial health. Liquidity ratio shows a comparison between the most liquid assets and short-term obligations of a company. A higher liquidity expresses that the company has not only a better ability to pay off its short-term debts but also a greater amount of cash for an unexpected needs. In another word, when a company has a low liquidity, the company may face a risk to pay its short-term debt and struggle to fund its long-term operation. The current ratio is one of the most common and useful terms used to measure the liquidity of a company. It suggests the capability of a company to pay back its liabilities with its assets. The current ratio is computed by dividing current assets by current liabilities. According to a financial

The current ratio is a widely used measure for evaluating a company’s liquidity and short-term debt-paying ability. The ratio is computed by dividing current assets by current liabilities. A high current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due. The 2016 ratio of 0.79:1 means that for every dollar of current liabilities, General Mills had $0.79 of current assets. The current ratio increased from 0.75:1 in 2015. Compared to the industry average of 1.83:1, General Mills appeared to be less liquid.

Current ratio is calculated by dividing current assets by current liabilities. Both variables are illustrated on the balance sheet. (Campbell R.Harvey, 2004c)

The current ratio will measure the organization ability to pay its short-term bills and other

▪ Use: An indication of a company 's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is. Current ratio is equal to current assets divided by current liabilities. If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liabilities exceed current assets, then the company may have problems meeting its short-term obligations.

The current ratio shows the company 's ability to meet its currently maturing obligations, and serves as the primary test to measure one 's liquidity position. B&N achieved a

The financial health of a business greatly depends on its ability to maintain current commitments and obligations. Liquidity or the ability to generate cash from current assets to meet short-term obligations as well as unforeseen responsibility is important for the subsistence of a company. “A reasonable level of liquidity is essential to the survival of a company, as poor cash control is one of the main reasons for business failure. (Pyke, 2007) Through utilization of tools, such as liquidity ratios, or financial metrics, to evaluate the company’s ability to meet current business obligations, should the debt needs to be settled, we are able to assess its immediate financial strength. Liquidity ratios provide creditors as well as businesses a quick analysis tool, using data, which are readily available from annual financial statements, to complete these assessments. These ratios are critical to creditors and are “the most widely used ratios, perhaps next to profitability ratios.” (Joe Lan, 2002) Liquidity ratios include current ratio, quick ratio (also referred to as acid-test ratio), net working capital ratio, and cash ratio. Current ratio is the most basic or fundamental of the four and focuses mainly on current assets, while quick ratio is more stringent, eliminating inventory and prepaid expenses, as both are more difficult to liquidate (Morningstar, 2016). Cash ratio is the most “conservative”, as it mainly focuses on cash and investments

The current ratio is also called the working capital ratio, as working capital is the difference between current assets and current liabilities. This ratio measures the ability of a company to pay its current obligations using current assets. The current ratio is calculated by dividing current assets by current liabilities.

Current ratio indicates how liquidity the company pay off its obligations, in the case of MyToys, the current ratio has somewhat decrease from 2014 to 2015. The higher the current ratio the company has, shows that the company is more favorable. The debt ratio and debt to equity ratio of MyToys is high, means the company almost need to sell off all of its assets to cover its debts. Having more than 0.5 shows the company is in a risky situation. MyToys do depend more on the bank loan because it is still a new grow company. In 2015, the company has reached the maximum limit of overdraft from the bank. MyToys need to reduce its debts in the future in order to draw in more investors to invest in the organization.

This ratio noted for Panasonic according to the calculations in 2013 3.87:1 and in 2012 4.62:1 it has decreased by 0.75 but its still records good for paying the liabilities, but if it is still goes on like that, it might cause a liquidity problem.(Gallagher & Andrew,

The first step in analysis liquidity is to calculate the company’s current ratio. It provides information about how many times the company can pay the current debt based on its assets. This ratio is the most accrued measure. The ratio is a measure of the short-term liquidity for a company. A high current ratio means that the company is able to pay its current obligation.

Any type of ratio analysis should be looked at within the correct context. For instance, investor's should look forward at a company's ratios against those of its competitors(which will give a clear picture of the business), its sector and its industry and over the previous and other backward years. Liquidity ratios using time-series analysis, competitive analysis which helps in knowing the company’s perforamace.

Theoretically, current ratio of 1 means that the company have cash and cash equivalents that are equal to current debt. Current ratio above 1 defines that company has sufficient cash and cash equivalents to pay back the current liabilities. While current ratio below 1 define that company lack of cash and cash equivalents to pay back the current liabilities.