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chapter 2 - in liquidity long term liabilities because they...

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John Rubinetti Professor Robert Kravet Financial Accounting September 14, 2007 Chapter 2 Questions 2. Current assets are resources that a company expects to convert to cash or use up within one year period. Companies list their items within the current asset section in the order which they expect to convert them into cash. One example would be the company listing cash as the first asset to be liquidated, because cash can be used to either re-invest or be used as payable. 6. A: Yes, Brenda is right, however she is leaving out solvency. She is paying attention to whether or not the company can turn their resources into cash, but by leaving out the idea of solvency she is disregarding whether or not they can pay their debts. This is not too practical for long term investing. B: All creditors and shareholders are interested in different areas of a company. Short terms creditors would be interested in free cash flow and currents assets because this would most likely result in a quick return on their investments. Long term creditors would be more interested
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Unformatted text preview: in liquidity, long term liabilities because they want a stable company that they feel will be around long enough to give them a return on their investments. Stockholders would look for companies that might frequently pay dividends or companies that put money back into their company providing growth which would in turn rise the price of their stock. 10. A: If a company has an increase of earnings per-share, this is generally a good thing and means that there were more shares sold and the net income was high. B: An increase in the current ratio is also good thing for the company. An increase suggests that the company has more current assets than liabilities or less liability than previous years. C: An increase in the ratio of debt to total assets is bad for the company, because the higher the ratio the lower the equity. This would mean that the creditors would have to provide a large amount of money to cover costs. In turn, that the company has a higher risk of solvency....
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