ACCT205 Week 5 Discussions and Responses.docx

Jessica wrote liquidity ratios can be used by

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Jessica Wrote Liquidity ratios can be used by investors to determine whether or not to invest in company by watching a company’s trends in liquidity, such as when “resources become bound up in receivables, inventory, and plant assets” (Wainwright, 2012. sec 9.3, para 1). If a company consistently shows they don’t have a sufficient amount of cash to meet current liabilities, it is a sure sign that an investor should not sink invest in that particular company. My Response Hi Jessica, I enjoyed reading your post! Liquidity ratios are used by investors to determine whether or not to invest in companies. Not only do they watch the company’s trends in liquidity, they also use debt service analysis techniques via debt services ratios to monitor the capability of long-term obligation maturities and watching if the short- term interest payments are met and the long-term is paid or refinanced. As Wainwright stated, ““it is difficult to go broke when a business has manageable debt loads, as reflected by small values for these ratios.” (2012). Lenders monitor these meticulously, to determine if they want to lend money to a company. One approach among several, is the Debt to-total-assets ratio which assesses the proportion of the asset financed with debt: Debt-to-Total-Assets Ratio= Total Debt/ Total Assets Another (among others) is Debt -to-equity ratio in which this one relates total debt to total equity: Debt-to-Equity Ratio= Total Debt/Total Equity Wainwright, S. K. (Ed.). (2012). Principles of Accounting: Volume I [Electronic version]. Retrieved from Discussion 1 Response 2 Student Wrote Financial ratios determine many different aspects of a business. Liquidity ratios measures how easily a company can pay its debt. Profitability ratios determines how well a company is making money. Financial ratios are relationships determined from a company's financial information and used for comparison purposes. Ratios provide a great deal of information; however, ratio don't show the whole story about a business. Liquidity ratios are used to see how a business handles their payments and debt. Investors use liquidity ratios to get a good overview of a company to determine if they want to invest in a company.
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My Response Hi Shavonte, Nice Post! I like the way you broke down liquidity, profitability, and financial ratios and you are right, they don’t tell the whole story. There are however is another set of ratios, that assist with the story. Naming the Debt- total ratio that allows the lender to monitor the proportion asset pool that is financed with debt. There is
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