Intermediate accounting Essay Example | Topics and Well Written Essays - 1500 words

Intermediate accounting - Essay Example Houston and Brigham (2009) state that, the outcome of the evaluation determines whether investors and other external users of financial information decide to retract or extend financing to the organization. The shareholders level of commitment to the organization may also fluctuate based on the outcome of the evaluations. There are several categories of ratio, each designed to assess a different aspect of an organization’s performance. The five categories are; liquidity ratios, profitability ratios, asset activity ratios and debt ratios. Liquidity ratios assess the ability of a business to convert its current resources into cash and payoff the company’s current obligations (Houston and Brigham, 2009). They include the quick ratio, also known as the acid test, the current ratio, cash coverage ratio and liquidity index. Quick ratio evaluates the ability of a company to fulfill any short-term obligations with assets that can be converted into cash quickly (Houston and Brigham, 2009). A quick ratio greater than 1 is an indication that the firm is able to liquidate all of its accounts. Current ratio examines the ability of a company to pay off its financial obligations in one year (Houston and Brigham, 2009). Current ratio accounts for current assets like account receivables and the company’s liabilities like account payables to help the manager understand the solvency of the company. A ratio lying within 1.5 and 3 indicates strong financial performance (Houston and Brigham, 2009). A current ratio of less than one is an indication that the firm might not be able to meet all of its financial liabilities if they are needed to be paid at the same time (Houston and Brigham, 2009). Current ratio that is relatively high and may indicate that the company is resting on a huge amount of money, rather than spending it in the company. Current ratio provides