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A
Introduction: The ratios are calculated using the information available in the financial statements of a company. Such ratios help the users of the accounting information to understand the liquidity, profitability and other related aspects of a company.
To prepare: The ratios analysis model.
A
Explanation of Solution
1. Formulate the Question
How liquid is C and P Company?
2. Gather the information from the financial statements.
The
3. Calculate the ratio.
Current ratio of both the companies has been calculated below −
C Company
Current ratio (2015) =
Current liabilities =
Current ratio (2014) =
Current liabilities =
P Company
Current ratio (2015) =
Current ratio (2014) =
4. Compare the ratio with other ratios.
| 2015 | 2014 | |
| C Company | 1.24 | 1.02 |
| P Company | 1.31 | 1.14 |
5. Interpret the ratios
Current ratio of C Company has improved a bit from 1.02 in the year 2014 to 1.24 in 2015 which means the liquidity of the company has improved.
Current ratio of P Company has improved from 1.14 in 2014 to 1.31 in 2015.
B
Introduction: The ratios are calculated using the information available in the financial statements of a company. Such ratios help the users of the accounting information to understand the liquidity, profitability and other related aspects of a company.
To prepare: The business analysis model.
B
Explanation of Solution
1. Formulate the Question
Should loan be sanctioned to C Company?
2. Gather information from the financial statements and other sources
Taking decisions about lending a loan or not is a crucial one and hence a variety of factors should be kept in mind while deciding whether C Company should be provided the required loan or not. Such factors include assessing the information gathered from balance sheet,
3. Analyze the information gathered
Analyses of the information gathered so far includes comparing the current ratio of C Company with P Company. The banker should look at the trends over time in the current ratio.
4. Make the decision
Decision needs to be taken about the loan should be sanctioned or not. Since the current ratio of the company has improved from the previous year and debts mentioned in the balance sheet are not that huge and can be paid off using the current assets, this suggests that the company has better liquidity. But only liquidity factor is not a good measure to decide about lending a loan or not, so the banker needs to look at profitability and other factors as well.
5. Monitor the decision
If the banker extends the loan, then periodic monitoring will be required and continuous analysis of the financial statements will also be required to identify the liquidity and credit paying capacity of the firm.
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Chapter 2 Solutions
Using Financial Accounting Information
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