Peer replies should be a minimum of 160 words, include at least 1 direct question and add value to the discussion
STUDENT 1: Gabriel
In this forum the topic is about Lance Berkman the controller of a dance club called Saturn. Lance Berkman has to prepares checks for suppliers in December, makes the proper journal entries, and posts them to the appropriate accounts in that month.However, he holds on to the checks and mails them to the suppliers in January. That is the situation Lance Berkman is in in this forum.
What financial ratio(s) is(are) most affected by the action? Lance Berkman has posted the checks in the account of the suppliers, which leads to decrease in Supplier's account. Since the checks are mailed in the month of January, there will be no outflow of cash regarding this transaction. The ratio which is the most effective is the current ratio.A current ratio is a "company's ability to pay current liabilities from current assets" (Miller-Nobles, p. 926). Current ratio is best financial ratio to use in this situation, since current ratio is solely used to calculate both current liabilities and assets of a company.
What is Berkman’s purpose in undertaking this activity? The purpose of undertaking in this activity is to show a better financial position by using a year-end balance sheet. The only way to show the financial actives of the dance club is by using a year-end balance sheet. A balance sheet "reports on assets, liabilities, and owner's equity of business as of a specific date" (Miller-Nobles, p. 19). So the year-end balance sheet shows more in detail of the financial actives like assets, liabilities and equities.
Miller-Nobles, T., Mattison, B., & Matsumura, E. M. (2018). Horngreen's Accounting, 12th Edition (12th ed.). Pearson.
STUDENT 2: Eric
When it comes to what Lance Berkman is doing with him holding onto the checks until the following month and mailing them off, the ratio that is most affected is the ratios used to tell whether the company is going to be able to pay off their current liabilities as well as the gross profit ratio. The three ratios are the cash ratio, the debt to equity ratio, and the acid test ratio. The cash ratio is a liquidity ratio which measures a company’s ability to pay meet their short-term obligations. The debt to equity ratio shows the total debt a company has, to their total equity. This ratio also shows how well a company is able to fulfill their obligations to creditors in let’s just say, the worst case scenario, the company fails at their goal of being successful. The last ratio, the acid test ratio, also known as the quick ratio shows whether a company has enough short-term assets to cover their immediate liabilities. Cash, short-term investments, cash equivalents, marketable securities and accounts receivable are just some of the items that are considered to be quick assets.
One reason that comes to mind is that Lance Berkman is waiting to send the checks in the following month is so that the company can seem more profitable. If Lance were to send the checks out in the month of December, then the company would show having less assets. Since he waits until the following month, the company closes its year out showing more assets and looking (on paper) the best way they can.