Reference no: EM132344624

Question

Now that you have analyzed your company's performance, you want to expand your business and decide to apply for a small business loan. You have all the financial statements prepared and provide them to the loan officer. The loan officer reviews your paperwork and requests the calculation of three ratios: working capital, acid test ratio, and current ratio.

How do you calculate working capital, acid-test ratio, and current ratio?

Why do you think banks or creditors look at these three particular ratios?

Do you feel these ratios are important to monitor or are other ratios are just as important?

1. Document to prepared cash flow is income statement and balance sheet.

2. Company should choose direct method because US GAAP and IAS recommended to companies present and direct method is useful to estimate the future cash flow of business. So, business have to prepare cash flow 13y direct method with reconciliation to the indirect method as supplementary information.

3. Company should prefer horizontal analysis it represent the position of business with compare of Premioua year.

Explanation:

1. Cash flow represent the report that show the cash generated and spent during a specific period.

For preparation of cash flow, we need 2 other documents that is called the income statement and the Balance sheet

Income statement represent the revenue and expenses of business.

Balance sheet represent the position of asset and liability at a point of time.

2. Cash flow statement can be prepared by two method, 1. Is Direct and Indirect method.

Direct method: US GAAP and IAS recommended to companies present or prepare cash flow statement though direct method, it is straight forward and easy to understand and direct method is useful to estimate the future cash flow of business.

Indirect method: It represent the Reconciliation of accrual accounting of net income in operating activities and indirect method is hard to difficult as compared to Direct method.

Company should choose direct method because US GAAP and IAS recommended to companies present and direct method is useful to estimate the future cash flow of business. So, business have to prepare cash flow by direct method with reconciliation to the indirect method as supplementary information.

3. Horizontal analysis is evaluating company performance because it under horizontal analysis company current position is compare with base or previous year that's will represent in amount and as well as percentage.

Vertical analysis is representing current year income statement in % by taking sales as a base of 100%. Company should prefer horizontal analysis it represent the position of business with compare of Previous year.