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Discussion Question

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This has been another fruitful week in Accounting II. This week I was experiencing some issues with Ratio Analysis. As you know, according to this week's reading "Ration analysis expresses the relationship among selected items of financial statement data. A ratio expresses the mathematical relationship between one quantity and another. The relationship is expressed in terms of a percentage, a rate, or a simple proportion." This seems pretty simple, but for some strange reason I just could not grasp it. For example, the relationship of current assets to current liabilities is 2.66:1. When dealing with ratios this type of question is very common.

Out of all the different ratios that I learned about this week, the two that I find to be most important are Liquidity Ratio and Acid-test Ratio. As I've stated in a previous post, I believe that cash flow is the two most important words in business. ACID-Test measures a company's immediate short-term liquidity. We compute this ratio by dividing the sum of cash, short-term investments, and net receivables by current liabilities, and the Liquidity Ratio measures the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. To me these two ratios represent cash flow. How much cash coming it, where is the cash coming from, where is the cash being spent? These are all valid question that managers, investors, banks, and stockholders must ask before they invest in a business with bad cash flow.

I had a very difficult time with the Wiley assignments this week. The statement presentations and analysis was not as easy as originally thought. Hopefully week five will be a lot better.



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