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Introduction

For this task, you need to comment on the financial health of the business by backing your assessment with the aid of examples of accounting ratio Solvency ratios Solvency ratio measures the financial soundness of a business and how well the company can satisfy its short and long-term obligations. Solvency ratio is divided into two current ratio and acid test ratio. Current ratio This year Formula Current asset/current liabilities Working out - �200,000/�130,000 Answer = �1.53 This means that for every �1 of current liabilities the business has �1.53 of current assets available. Normally it should between �1.5 - 2. A figure less than 1.5 indicates that the business may experience difficulties in meeting its short-term debts. ...read more.

Middle

The business was financially healthier last year than this year. This because the business had �1.60 of current assets to pay it current liabilities last year, but only had �1.53 of current asset to pay for it current liabilities this year. Therefore, this indicates that the business was in better financial position last year. Acid test ratio Formula Current asset - stock/ current liabilities Working out - �200,000 - �22,000/130 Answer = �1.37 This means that for every �1 of current liabilities the business has �1.37 of current asset available at short notice. Normally the answer should between �1 - 2. A figure less than �1 indicate that the business may experience difficulties in meeting it short-term debts. ...read more.

Conclusion

This simply means a business can pay its creditors by possessing enough working capital. The acid test ratio helps the business know how quickly it can pay it creditors by deducting the stock. The acid test ratio is more accurate than the current ratio in terms of liquidity. This is simply because the acid test ratio deducts the value of stock from the current assets. For a business to be able to turn stock into cash could take some time as cash from any sale will only be received according to the business trading agreements. For example, a business may look healthy using the current ratio, but may be carrying too much stock. Margin of safety will help the business whether they are able to break even and see the percentage that they surpass the breakeven point. ?? ?? ?? ?? Abdulaziz Omar Unit 2 - Investigating Business Resources ...read more.

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