Chapter 17, Problem 7E

To determine

Introduction:

Ratio Analysis

• Ratio analysis is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Current Ratio – It is a measure of the relation between the current assets and current liabilities and seeks to measure the ability of the business to fulfill its short term obligations.

• Current assets are assets that are convertible to cash within a period of one year or less. Current liabilities are liabilities that need to be discharged within a period of one year or less.

$\text{Current Ratio = Current Assets / Current Liabilities}$

• Acid Test Ratio – Also known as quick ratio, it seeks to measure the liquidity position of the Business.

• It seeks to measure the short term liquidity position of the business by comparing the liquid assets i.e. current assets that are readily convertible to cash / liquid instruments and current liabilities.

$\text{Quick Ratio = Quick Assets / Current Liabilities}$

To Calculate:

Current Ratio and Acid – Test Ratio of Simon Company at the end of 2017, 2016 and 2015.