P7 Solvency is when a business is able to pay is expenses as it has money available within the business. To determine solvency, businesses can use ratios such as current ratio and acid test ratio. These ratios allow businesses and potential investors to see how well that are able to meet their liabilities. Current Assets Current ratio = Current liabilities The acid test ratio shows the assets compared to liabilities, like the current ratio, but by taking out the stock figure from the current assets, it shows how well a business can meet its liabilities without having to sell stock, Current assets - stock Acid test ratio = Current liabilities Profitability Ratios can also show how profitable a business really is either as a snapshot or over time. There are three ways of working out how profitable a business really is: * Gross profit percentage – This calculation shows gross profit as a percentage of the turnover.
Cash basis also records accounts payable the date that it was paid rather than the billed date. Those are the two main differences on how it reports monetary data, other differences are the type of businesses that would utilize the two different accounting basis. Smaller business would most likely use cash basis simply because it is easier to manage. One major benefit to cash basis is that it identifies more clearly cash on hand, but a major down side is that it paints a bad picture of the company’s services that it performs. It paints a bad picture because the business may collect zero revenues for a month and pay accounts payable during that month showing a loss of revenue while the next month they may pay zero accounts payable but receive two month’s worth of accounts payable, this would indicate that the company had higher than realistic earnings.
Having a ratio below one likely means they had to take out some sort of financing to cover their obligations for the year without some sort of financing. Seeing a current ratio of below one is a scare for many investors because, a ratio of below 1 raises issues with the company’s financial well-being. Debt Management Ratios Debt management ratios show to what extent a company uses borrowed funds to finance its operations. These ratios are important to a company because creditors use them to determine the riskiness of the company’s financial position. Using the debt ratio we can determine how much of Dr. Pepper Snapple Group’s assets are provided through debt.
These are important to the investors who are looking at the company but also to managers. Exercise 7-2: Answer the following questions about the statement of cash flow and the statement of retained earnings. 1. The current month’s net cash provided by operations is $34,936.57 2. The year-to-date’s net cash provided by operations is $4,717.37 3.
| b. | Commercial paper issued to finance inventory. | c. | Current maturities of long term debt. | d. | Accounts receivable generated by sales on credit. | e. | Inventory purchased with cash.
If you had one that showed a breakdown by division, how would you use it?". A cash flow statement helps to evaluate performance because: It determines the ability of the company and each division to generate cash flows from operations. “Cash is king” for some analysts. We could see how is the cash for investments being allocated. How is the company financing their new capital expenditures, stocks or debt.
(i.e. If cash is invested in these investments, the cash decreases by the same amount that the cash equivalent increases; later on, when cash is withdrawn, the cash increased by the same decrease in the investment) Except the case if they were sold at a gain, the gain would be reported under operating activities which is not a part of the situation here. 3. Issuance of debt securities and issuance of equity securities are classified as Financing Activities in a statement of cash flows. Issuance of bonds and other debt and equity securities are included as cash inflows resulting from external financing.
Open market operations are the United States Treasury’s and Federal agency securities’ purchases and sales. The objective of the open market operations is to discover a “desired quantity of reserves or a desired price (the federal funds rate)” (“Board”). The federal funds rate is the rate at which certain bank establishments are able to lend balances to the Federal Reserve to other particular banks overnight. It seems like such a great idea, but now a days, the Federal Open Market Committee is unsure about the risk it bestows to the extensive goals of price solidity and manageable economic
The income statement is important because it will show whether the company’s revenue exceeded expenses for a specific period resulting in net income or the amount the company may have lost because the expenses exceeded the revenue. The retained earnings statement is equally important because it will indicate the exact reason why the company’s retained earnings increased or decreased over the reporting period. The balance sheet is important because it is the overview of the company’s financial condition at the time of the reporting period and the statement of cash flow’s is important because “Reporting the sources, uses, and change in cash is useful because investors,creditors, and others want to know what is happening to a company’s most liquid resource.” (Weygandt,
The assets on the sheet are company holdings. The liabilities are the salaries, accounts payable, and notes payable. The balance sheet is a quick look at the company as a whole at any time which is usually over a specific period of time. The balance sheet should be available on demand for accounting managers to make decisions on where the company stands on dispensable cash and what can be used to purchase materials for inventory. The statement of cash flow tracks all the cash moving in a company during a specific accounting period.