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Note: Last date of GDB Submission is June 08, 2022.
Topic: Ratio Analysis
Scenario:
Mr. Anwar is recently appointed as CEO of ABC Corporation Limited. As a
new head of the organization, he wants a briefing regarding the current
situation of different departments in the organization. During the briefing
from Chief Financial Officer (CFO) of the organization, he comes to know that
the liquidity position of the company is not sound as the current and quick
ratios are 0.90 times and 0.30 times respectively. Mr. Anwar is a mechanical
engineer and lacks the financial knowledge to comprehend the financial
information.
Requirement:
Being a student of Business Finance, how would you interpret the results
of current ratio and quick ratio to Mr. Anwar with reference to the liquidity
position? If both ratios measure the liquidity, why is there a difference in
their figures?
Recommend you to Read:
Answer:
Ratio Analysis: Another way of avoiding the problems involved in
comparing companies of different sizes, is to calculate and compare financial
ratios. While using ratios as a tool for analysis, you should be careful to
document how you calculate each one, and, if you are comparing your numbers to
those of another source, be sure you know how their numbers are computed.
SOL:
Current Ratio = 0.90
Formula of Current Ratio = Current Assets / Current Liabilities
Current Ratio = 0.90
Formula of Current Ratio = Current Assets / Current Liabilities
It doesn't have enough liquid assets to cover its
short-term liabilities.
Quick Ratio = 0.30
Formula of Quick Ratio = Current Assets – Inventory / Current Liabilities
It has no liquid assets to pay its current liabilities and should be treated with attention.
Formula of Quick Ratio = Current Assets – Inventory / Current Liabilities
It has no liquid assets to pay its current liabilities and should be treated with attention.
The quick and current ratios are
liquidity ratios that help investors and analysts measure a company's ability
to meet its short-term obligations. The current ratio divides current assets by
current liabilities. The quick ratio only considers highly-liquid assets or
cash equivalents as part of current assets.
ACC501 GDB Solution 2022 PDF
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