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Principle of Accounting

A higher current ratio indicates that the company has enough liquidity to meet its short term obligations. However, the too-large current ratio may be negative as this would indicate that assets are not being utilized effectively. As shown from the above calculations, Company ‘C’ is performing better than the other two companies in terms of maintaining liquidity to serve its short term liabilities.The higher the debt ratio, the difficult it will be for the company to meet its long term obligation and hence to remain solvent in the long run. Although all three companies have a debt ratio of less than 1. but Company ‘B’ is performing better than the other two companies in terms of managing its long term solvency.The asset mix provides information about the percentage of each asset category in the overall asset portfolio of the company. This information assists potential investors while making the decision about whether to invest in the company.The above calculations show that 70% of assets of Company ‘C’ are current assets. whereas Company ‘B’ has 30% current assets. Company ‘A’ has equal percentages for current and non-current assets. An exact interpretation is difficult to make from these results only. This is because the assets mix depends upon other factors like the industry of business, need for keeping high inventories, or more fixed assets for long term productivity, and other factors. However, on the face of it, it can be said with certainty that C’s philosophy is to keep a higher percentage of liquid assets (maybe cash or inventory) to be able to react to market conditions relatively quickly. However, it may also mean that ‘C’ is unable to collect its receivables (current asset) as efficiently as ‘B’. which may also lead to a higher current asset mix. Regardless of the composition of current assets, Company A’s performance is midway between ‘B’ and ‘C’.An operating lease is one where the owner (lessor) of the property transfers the right to use the property to the lessee. The asset remains the property of the lessor. thus all risks remain with the lessor. Lessee just pays off the lease expenses and returns the property to the lessor at the end of the lease period. The leased property does not show on the lessee’s balance sheet. Instead, the user is shown as an operating expense in the income statement.

Principle of Accounting