FNT1_Task1_LAST (1) - Ratio Analysis: Current Ratio The...

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Ratio Analysis: Current Ratio The Current Ratio (1.69) is calculated by dividing Total Current Assets by Total Current Liabilities from the Balance Sheet. By comparing current assets with current liabilities the Current Ratio measures a company’s ability to pay its debts over the short term (next 12 months). Year 11’s Current Ratio is down 8% from year 10. This drop in Current Ratio is generally considered a weakness and when compared with industry data it shows company D to be in the lower end of that data. The lower Current Ratio points out that while Current Assets rose in year 11 at a good rate of 15%, Current Liabilities rose at a much higher rate of over 24%. Acid-Test Ratio The Acid-Test Ratio is calculated by adding cash, cash equivalents, short-Term investments, and net accounts receivable then dividing by total current liabilities. The resulting ratio when compared to industry standards gives a more accurate snapshot of how well the company can pay its bills. The Acid-Test Ratio is a better gauge of health than the current ratio because it excludes inventory from the computation. Although inventory could be sold off or liquidated, it takes time and is therefore less applicable to the company’s situation today. Company D has an acid-test ratio of . 39 which is substantially less than the industry standard and is an apparent weak sign of company
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This note was uploaded on 08/25/2011 for the course BUSINESS LET taught by Professor Mentor during the Spring '11 term at Western Governors.

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FNT1_Task1_LAST (1) - Ratio Analysis: Current Ratio The...

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