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Essay example - business accounting

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Pages 4 (1004 words)
The performance of a business organization is quantitatively reflected in its financial statements. Ascertaining the financial health of a company has become important to different decision makers like managers, stockholders, potential investors and creditors…

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Financial ratio analysis enables decision makers to uncover trends in business performance and compare different business organizations (Keown, et. al 2005). It should be noted that these ratios are classified according to the aspects that they measure including profitability, liquidity, efficiency, solvency, and investor ratios. Considering that the business organization under consideration is considered small and medium business organization, this report will focus only on profitability, liquidity, and efficiency.
In terms of liquidity, the current ratio and the acid-test ratio will be utilized. At first look, the Northern Branch displays a slightly higher level of liquidity with its current ratio of 1.060. Should all of its current liabilities become due immediately, The Southern Branch will only be able to pay off 99.6% with its current assets. However, the acid test ratio shows that most of the Northern Branch's most current assets are tied up in inventories. In fact, when inventory is deducted from the current assets, it will only yield an acid-test ratio of 0.34. On the other hand, the Southern Branch has much more liquid assets indicated by its acid test ratio of 0.54.
In terms of efficiency, the following ratios will be considered: debtor's turnover; debtor days; creditor's turnover; creditor days; and stock tur ...
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