Helpful Ratio When Analyzing Liquidity and Solvency - Assignment Example

Basically, the current ratio finds out the liquidity of a firm by its current assets and current liabilities. A firm should at any time have enough current assets like cash and inventory to cover current liabilities like payables. Solvency on the other hand is the ability of a firm to meet its long-term obligations. This can be found out by calculating the debt to equity ratio. In this ratio, the value of the equity contribution by shareholders is measured against the long-term debt of a firm.
Financial statements are reports produced by businesses at the end of any financial year. They show how a business is performing financially. Without further analysis, financial statements alone are not of any value to a stakeholder. This, therefore, call for their analysis. This is done through the use of various tools. One of the widely used tools for financial analysis is through the use of ratios. Ratios tell how a firm is performing in various aspects like liquidity, solvency among others. Other tools used include; Comparative Financial Statements, statements of changes in working capital, common size balance sheets, and income statements, and trend analysis.

A balance sheet is one of the financial statements that are produced by a business at the end of a financial year. It shows the assets, liabilities, and equity of a business. There are various forms of balance sheets. One of them is a classified balance sheet. A classified balance sheet is one that has classifications such as current assets, property plant and equipment, current liabilities, and long-term liabilities. Current assets are those assets of a business that can quickly be turned into cash. They include cash at the bank, inventory, and liquid cash.

3. What makes the Generally Accepted Accounting Principles so important to the financial community? What are some of the more prominent financial ruling agencies and what purpose do these agencies serve the public?

Accounting is a global profession. This has been made so due to technology. Businesses are now operating in different countries and continents as well. This has necessitated the need of having generally accepted ways of doing business accounts. This led to the creation of generally accepted accounting principles. Through these principles, financial accountants are able to be held accountable on them no matter the location that they are practicing. Countries have gone ahead to set up agencies that help in the implementation of the Generally Accepted Accounting Principle. Some of these agencies include Federal Reserve Board, Securities Exchange Commission, and Federal Deposit Insurance Corporation, etc. Basically, they work towards the protection of civilians.

4. Describe a specific concept of financial reporting?

Financial reporting can be described as the process of making public statements that bear information on the financial status of a company to the management, investors, government, and other stakeholders. One of the concepts of financial reporting is general purpose financial reporting. This concept asserts that a financial report should provide the basic information needed by all stakeholders. An example of a stakeholder is an investor. Through the financial report under this concept, an investor should be able to have enough information to be able to make a decision as to whether to invest or dives into the company.

5. The video suggested that the financial statements be prepared in a certain order - why do you think this is true?

Due to modernization and globalization, businesses are now being conducted across different jurisdictions. People are also now able to invest in different countries. It is therefore important that there is uniformity in how financial statements are prepared globally. This will ensure ease of understanding which translates to ease of doing business internationally. An investor in Europe should be able to understand the financial statements of a company based in the United States if they are interested in it. This can only be possible if the financial reporting is standardized.