Short Answer Questions 1. What are the major sources of financial information fo

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Short Answer Questions 1. What are the major sources of financial information for publicly owned corporations? 2. The higher the accounts receivable turnover rate, the better off the company is. Do you agree? Why? 3. Can you think of a situation where the current ratio is very misleading as an indicator of short-term, debt-paying ability? Does the acid-test ratio offer a remedy to the situation you have described? 4. Through the use of turnover rates, explain why a firm might seek to increase the volume of its sales even though such an increase can be secured only at reduced prices. 5. Cite some of the possible deficiencies in accounting information, especially regarding its use in analyzing a particular company over a 10-year period.

Explanation / Answer

1. Financial statements are used to study the financial health of a company by its stakeholders. A publicly owned company is required to regularly submit its financials to the Securities and Exchange Commission. (SEC) .There are 3 major sources of financial information for publicly owned corporations:

2. The higher the accounts receivable turnover ratio, the better off the company: agree

This ratio is an indicator of the company's effectiveness to offer credit and collect its debts in time. It is calculated by dividing the net credit sales by the average accounts receivable. Hence, the higher the ratio, the more number of times the company is able to turn around the cycle of debt collection and the more efficient it is in collecting its debts over a shorter period of time.

3.Current ratio is computed by dividing the current assets by the current liabilties. It is an indicator of the short-term liquidity of the company's business. However, sometimes this ratio can be a misleading indicator of the short term debt-paying ability of the company when the proportion of illiquid inventory in the current assets is too high. A high amount of current assets improve the current ratio, however, when the inventory is of non-moving or illiquid nature, it means that the company cannot dispose of it quickly and convert the same into liquid assets/cash. This hampers the ability to term its other short term obligations, and hence the current ratio is non-indicative in such cases.

Yes, the acid test ratio offers a remedy in such cases. This ratio is computed by dividing the current assets that can be quickly converted into cash within 90 days by the current liabilties. Here, the inventories (liquid or illiquid) get deducted from the current assets, giving us a clearer picture of the company's abiltiy to finance its short term debts.

4. Some companies choose to keep the profit margins low and the volume of sales high. By keeping the margins low, the price of the product becomes lower as compared to the competitors, and the company can as a result sell higher volume, due to the price competitiveness. The higher volume of sales results in economies of scale, in turn resulting in overall profits in the company.

5. Some of the deficiencies in accounting information , especially in analysing a company over a long term period of 10 years are:

Business cycles not correctly defined:Most businesses are subject to a cyclical trend of highs and lows. Managers need to correctly predict and define these business cycles during financial reporting in the form of budgets, estimates, etc

Outdated information systems: With changing technology, information and financial accounting systems and software may change over a period of time, and if the company does not keep up with these changes, its financial reporting may be hampered

Inadequate disaster control management systems: If backups are not continuously maintained, and anti-virus is not continuously updated, the chances of data loss are high. Hence, it is essential to maintain proper backups and also keep a data recovery plan in hand

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