Ratios

I have been asked to illustrate the financial state of a given business by using ratios, to do this I will use accounting ratios to show the financial sate of Scrumptious.
One of the ways a business can measure how it is doing is through ratio analysis. Ratios can help Scrumptious to see how it is doing now and how it compares to last year of the year before and against competitors. For these ratios to be useful, they should be compared over time to see if there are any trends and also compared between businesses within the same industry. I will be using the following ratios
Solvency Ratios, Profitability Ratios and Efficiency Ratios, to illustrate the financial state of Scrumptious.

Solvency Ratios

Businesses can use ratios to work out their solvency by using current ratio and acid test ratio. These ratios allow businesses and potential investors to see how well they are able to meet their liabilities. A business is considered to be solvent when it can pay its debts as they become due. In day to day terms, this means it can pay its suppliers by having enough working capital. There are two key ratios that help business determine whether their business is showing a solvent position.

Current ratio

This ratio shows how many assets a business has compared to liabilities. It shows how easily it would to be paying its creditors to current ratio looks at relationship between current assets and current liabilities. These figures are always shown on the balance sheet and the ratio is calculated as follows:

Current ratio= Current Assets / Current Liabilities
32879/4613 = 7.1 If the figure is just over 1, then the business may be in a difficult position for payment as it is considered good practise to have a figure between 1.5 and 2, so that the business can be sure it that the business has enough cash to be able to pay its debts. This figure