Financial Reporting and Ethics - The Institute of Chartered ...

FINANCIAL REPORTING AND ETHICS(a)Current Or Working Capital Ratio:Current AssetsCurrent Liabilitiesx 100%Current ratio is a measure of a company’s short term solvency. Itindicates the available current assets in naira for every one nairaof current liabilities. A ratio of greater than one indicates thatthe company has more current assets than current liabilities.As a conventional rule, a current ratio of 2:1 is consideredoptimally satisfactory. Current ratio represents a margin of safetyfor the creditors. The higher the current ratio, the greater themargin of safety, that is, the larger the amount of current assetsin relation to current liabilities, the more the company’s abilityto meet its current obligations as they fall due.(b)Quick asset ratio or Acid test ratios:Current Asset Less StockCurrent Liabilitiesx 100%Generally, a quick asset ratio of 1:1 is considered to be optimallysatisfactory to the current financial condition.Although quick ratio is a more penetrating test of liquidity thancurrent ratio, yet both need to be used continuously together.It is also important to note that current and quick ratios of acompany that is trading on cash basis will be very low comparedto the ratios of manufacturing organisations who operate withliquidity ratios closer to the standard ratios.The trend, rather than the absolute value of the ratios, is moreimportant. One can easily ascertain whether the liquidity of acompany is improving or deteriorating if one looks at the trendof the ratios.(c)Cash Ratio:Cash plus Cash equivalents x 100%Current LiabilitiesCash is the most liquid asset in the financial statements of acompany. A company may have a small cash ratio.This may not be worrisome provided that it has a reserve ofborrowing power.(d)Debtors’ Collection Period76