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BUS FP3061 McAndrewVanessa Assessment5 Attempt2 part 2

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BUS-FP3061 Assessment 5, Part 2 Template
BUS-FP3061 Fundamentals of Accounting
Ratio
Year 1
Year 2
Current ratio
3.12:1
2.96:1
Quick ratio
1.34:1
1.02:1
Receivables turnover
9.7 times
10.2 times
Inventory turnover
2.4 times
2.3 times
Profit margin
11.4%
12.6%
Asset turnover
1.21 times
1.22 times
Return on assets
13.7%
15.4%
Return on equity
28.5%
29.3%
Price-earnings ratio
10.4 times
12.4 times
Debt ratio
50.2%
45.3%
Times interest earned
9.6 times
13.0 times
CURRENT RATIO
Year 1 Year 2
3.12:1 2.96:1
Trend
There is a negative trend in liquidity indicated by the analysis of current ratios which showed a
decrease of the firm’s liquidity from year 1 to year 2. The company’s ability to pay off its current
liabilities when they become due has reduced. A higher current ratio is more favorable than a
lower current ration because it shows that the company can more easily make current debt
payments. 2.96:1 is still above the required minimum of one meaning the company can
confidently pay off its current dues.

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These figures gives insight into the liquidity of the firm, that is, its ability to pay of short-term
liabilities with its current assets for year 1 and year 2. It is a measure of liquidity because short-
term liabilities are usually due within a year. It helps investors and creditors understand how
easily a company will be able to pay off its current liabilities. This ratio expresses a firm’s
current debt in terms of current assets.
Recommendations
It can be improved by adding more current assets as compared to the current liabilities. This
involves holding more current assets in future and reducing the value of current liabilities.
Current assets include inventories, cash, receivables etc. while liabilities include any dues
payable within the next financial year.
QUICK RATIO
Year 1 Year 2
1.34:1 1.02:1
Trend
There is a negative trend in the liquidity evidenced by the quick ratio for the period under
consideration. Analysis shows that the quick ratio increased from 1.34:1 to 1.02:1 meaning the
liquidity has reduced in year 2. This is not a good sign for investors and creditors. Like the
current ratio, it also measures the liquidity of company by looking at the ability of a company
paying its current liabilities when they come due with only quick assets.
Recommendations
The company should add more quick assets holdings to improve its ability to pay off current
liabilities when they become due. The total current liabilities amount should be reduced in the
financial statements. The increased currents include the ones that can be converted to cash easily.
This means inventory is excluded in its calculations. If a company has enough quick assets to
cover its current liabilities, the company will be able to pay off its obligations without having to
sell off any long-term asset. A higher quick ratio greater than 1 is advantageous because there are
more quick assets than current liabilities.

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BUS-FP3061 Assessment 5, Part 2 Template BUS-FP3061 – Fundamentals of Accounting Ratio Year 1 Year 2 Current ratio 3.12:1 2.96:1 Quick ratio 1.34:1 1.02:1 Receivables turnover 9.7 times 10.2 times Inventory turnover 2.4 times 2.3 times Profit margin 11.4% 12.6% Asset turnover 1.21 times 1.22 times Return on assets 13.7% 15.4% Return on equity 28.5% 29.3% Price-earnings ratio 10.4 times 12.4 times Debt ratio 50.2% 45.3% Times interest earned 9.6 times 13.0 times CURRENT RATIO Year 1 Year 2 3.12:1 2.96:1 Trend There is a negative trend in liquidity indicated by the analysis of current ratios which showed a decrease of the firm’s liquidity from year 1 to year 2. The company’s ability to pay off its current liabilities when they become due has reduced. A higher current ratio is more favorable than a lower current ration because it shows that the company can more easily make current debt payments. 2.96:1 is still above the required minimum of one meaning the company can confidently pay off its current dues. Capella Proprietary and Confidential ShortDoc_Internal.doc Last updated: 10/3/2021 1:42 AM 1 Title These figures gives insight into the liquidity of the firm, that is, its ability to pay of short-term liabilities with its current assets for year 1 and year 2. It is a measure of liquidity because shortterm liabilities are usually due within a year. It helps investors and creditors understand how easily a company will be able to ...
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