Both the working capital ratio or current ratio and acid test ratio represent the liquidity ratios of the company. The liquidity ratios demonstrate the ability of the company to meet its current liabilities by utilizing the current assets (Greenwood). Normally the ratio between current assets and current liabilities lying in between 2:1 and 1.5:1 would imply that the organization has the ability to meet its current liabilities from the resource available in the form of current assets. However, the theory of working capital cycle provides that it would take more time to convert the current asset of stock into cash in order to meet the current liabilities.
Therefore the ‘acid test ratio’ which excludes stock from the calculation is adopted to assess the liquidity position of the company. In the case of Company J historically the current ratio shows an increasing trend from 1.80 in 2003 to 2.05 for the year 2007. Whereas the acid test ratio has gone down from 0.60 in the year 2003 to 0.25 in the year 2007. This implies that the company over the year has accumulated more stock and is unable to realize the value of the stocks to meet its current liabilities. This situation would lead to the bankruptcy of the company as the cash resources available with the company has gone down over the years and soon it would reach a position where it has no liquid resources to meet its current liabilities.
Company ACCT5144C – Performance Report based on Variances
Sales for the year ended 30th June 2009, shows an unfavorable variance of 4.06%. This is because of an unfavorable sales volume variance in respect of sale of water by the firm. As against the budgeted units of 90,000 the company could sell only 87,500 units resulting in an unfavorable volume variance of 2.78%. This unfavorable volume variance is partly offset by the favorable volume variance in the case of juices. A combined effect of the variances in respect of both water and juices has resulted in a total sales volume variance of 0.08%. However this has not helped the firm to meet its budgeted sales value. Though the sales volume has a favorable variance in total, the sales value variance has an unfavorable variance of 4.06%, which in dollar terms amounts to $ 39,900.
The company although has an unfavorable sales value variance in respect of water, the company has performed better in terms of cost of goods sold for water. There the company’s operations have resulted in a favorable performance of 18.28%. This favorable variance in cost of production in water has offset the unfavorable variance of cost of goods sold of juices and resulted in a total favorable variance f 11.23% ($ 44,168) for both the products.
The company has performed better in respect of salaries and advertising where the operations have resulted in favorable variances as compared to the budgeted amounts. However the company has over spent more than the budget in the case of office expenses. All the expense variances put together has enabled the company to achieve a total favorable expense variance of 2.19% which in dollar terms is $ 9,280.
Because of the saving in cost of goods sold and the expenses the company could achieve a favorable performance of 8.17% in the net profit irrespective of the fact that the company could not meet its budgeted sales for the year ended 30th June 2009.
Greenwood, Robert P. Handbook of Financial Planning and Control. UK: Gower Publishing Limited, 2002.