Abdulaziz Omar

Unit 2 – Investigating Business Resources

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. A figure more than 2 indicates that the business may be holding cash in an unproductive and unprofitable form, it may better use elsewhere.

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Last year

£192.000/£120.000

Answer = £1.6

This means that for every £1 of current liabilities the business has £1.60 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. A figure more than 2 indicates that the business may be holding cash in an unproductive and unprofitable form, it may better use elsewhere.

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 ...

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