Thesis: Liquidity Ratios

Sample Thesis Paper

Liquidity ratios are calculated using the Balance Sheet of a company. They are used to calculate and interpret the ability of the company to cover its daily financial obligations. Current assets are compared to current liabilities to determine whether the current assets are sufficient to cover current liabilities. Broadly speaking, the greater the excess of current assets over current liabilities, the more beneficial it is for the company in meeting the current obligations. However, if the ratios are too high, this means that too much cash or current assets exist and this money could have been used elsewhere to generate a return for the company.  The main liquidity ratios are the Current Ratio, the Quick (Acid Test) Ratio, the Cash Ratio, the Days Sales Outstanding and Inventory Turnover Ratio (Gibson 1998).

Current Ratio

The Current Ratio is calculated by dividing Current Assets by Current Liabilities. This ratio reveals the ability of the firm to meet its short term liabilities. The current assets are shown as a ratio of current liabilities. The current assets include cash, accounts receivable, inventory and marketable securities and any other liquid assets. The Accounting Dictionary defines Current Assets as ‘item having a life of one year or less, or the normal Operating Cycle of the business, whichever is greater’ [Online]. Basically the ratio shows how the short term debts are covered by the current assets (Gibson 1998).

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