Discussion Assignment
In the discussion forum you are expected to participate often and engage in deep levels of
discourse. Please post your initial response as early as possible and continue to participate
throughout the unit. You are required to post an initial response to the question/issue presented in
the Forum and then respond to at least 3 of your classmates’ initial posts. You should also
respond to anyone who has responded to you.
Based on the reviews of the Financial Ratios and Trend Analysis, respond to 3 of the following
discussion questions.
You are encouraged to research outside sources and, of course, cite them. Do not, however,
quote sources word-for-word, but rather, respond to the Discussion Forum Question in your own
words.
Introduction
Short Terms liquidity ratios help explain whether a company can meet its short-term
obligations should it need (Heisinger & Hoyle, 2012, p. 1070). In effect, Short Terms liquidity
ratios measure how soon a company could pay of any creditors or debts should an emergency or
crisis call for it. Knowing these ratios helps the manager to assess the health of the company
For this discussion, three questions about Financial Ratios and Trend Analysis—with a focus on
the Short Terms liquidity ratios—from the eight options, are addressed.
1. What three factors would influence your evaluation as to whether a company’s current
ratio is good or bad, why?
Current Ratio, also called “working capital ratio” (“Current ratio,” n.d., para. 1). A ratio of 2:1 or
higher is considered satisfactory for most of the companies. But it requires a deeper analysis of
the current assets and current liabilities to interpret what the current ratio means (para. 7).
Heisinger & Hoyle (2012) warn that the best current ratio is dependent on three main factors: (1)
the industry, (2) the overall financial condition of the company, and (3) the composition of the
company’s current assets and current liabilities (p. 1071). Each is explained below:
The Industry Standard – Current ratio is normally used to compare with other companies. That
assumes all similar companies use the same accounting procedures, they may not. Differing
procedures may give differing ratio results. Also, it assumes there is a common standard within
the industry. It could be that 3:1 is a better current ratio in this particular industry. Whatever it is,
the company must be aware of it.
The Financial Condition of the Company – The real condition or health of the company could be
hidden in the current ratio. For example, while the ratio may be solid, a company with a high
volume of slow to move inventory is in worse shape than a company with a low volume of
inventory but is high in liquid assets such as of cash or accounts receivables (“Current ratio,”
n.d., para. 10)
The Composition of the Current Assets and Liabilities – Related to the above, the nature and
timing of what and when a company’s current assets and liabilities must be considered. Again, a
high volume of inventory is problematic, because that inventory has to be sold to truly become as
asset. Also, assets and liabilities are not static, and depending on the timing of when the current
ratio is performed, it will fluctuate. Some companies may show low current rations one moth
because their inventory or sales are down, and high the next month because sales and/or
production is up. This is where Quick Ratio, which “indicates whether a company has sufficient
quick, or highly liquid, assets to cover current liabilities” (Heisinger & Hoyle, 2012, p. 1072)
becomes a better measure. It more accurately assesses the current assets and how soon they can be
turned into liquidity (p. 1072).
Thus, As the Current ratio (n.d.) article states, “To reduce the effect of above limitations current
