Foundations of Accounting - Essay Example

and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate”. It’s important that the there should not be any misleading through the concealment of accrued expenses or through overstated income by false profits. Contingencies and commitments should be disclosed in the form of note, if any. The current ratio, the liquid or acid test ratio and the stock turnover basically considered as the short term liquidity ratios as they are used to calculate the ability of a company to meet its current liabilities with its current assets.

Enough cash must be available to payoff the short term liability like trade creditors usually within 12 months including those who required immediate payments like of 2to 3 months. A ratio of between 1.5:2 and 2:1 are considered reasonable (Randall).while a current ratio in excess of 2:1, shows that the resources are not efficiently used and the investment is tied up in huge stocks , debtors or unnecessary accumulation of cash in banks. As evident from the figures, the current ratio incase of poodle ltd of 1.

5:1 is acceptable while incase of Collie limited it should be decreased by 0.5, i.e. it has to be around 2:1, so as to be acceptable. Liquid ratios are generally calculated to check the ability of the company to meet its current debt through the current assets other than stock. The purpose is to assess that whether is an unnecessary accumulation of stock or not. It may be either of raw material or WIP or even of finished goods. A liquid ratio of 1:1 is usually considered satisfactory but it can decrease till 0.

9:1 (Randall), provided that there the provision for doubtful debts is not very high, i.e. the prompt payment from the customers is expected. It indicates the average no days the inventory is tied up in the Store room. Usually the higher the inventory level the better it will be but in some cases