DESCRIPTION: THIS BOOK COVERS THESE CRITICAL AREAS: FINANCIAL STATEMENT ANALYSIS, BREAK EVEN ANALYSIS, RETURN ON INVESTMENT, MANAGERIAL ACCOUNTING, DEVELOPING A STRATEGIC BUSINESS PLAN, CASH FLOW STATEMENT, INTERNAL CONTROLS, BUDGETING, GENERATING LIQUIDITY, TURNAROUND STRATEGIES, AND MUCH MORE.USE YOUR FINANCIAL STATEMENTS TO MAKE INFORMED MANAGEMENT DECISIONS.

ISBN: 1-57002-069-8

AUTHOR: RANDELL L.NYBORG
PRICE: $29.95

EXCERPT:
Inventories
1. The conversion of inventories to cash depends on sales, yet sales are not included in the current ratio calculation. A high level of inventory will yield a higher current ratio, but the high level may be due to poor sales and the firm's inability to move the inventory.
2. Modern inventory management tends to minimize or eliminate (just in time) inventories.


Ratios

1. Current Liabilities
    a. The current ratio purports to measure if the level of current liabilities is at a safe level, but the ability to redeem the liabilities is mostly a function of the level of sales, which the current ratio does not include.
    b. Creditors use the current ratio because it shows funds available if the firm were to shut down completely tomorrow, but this is not a valid assumption for most firms and violates the "on-going concern" principle.
    A better measure of short term liquidity than ratios are cash flow projections and "what if" (pro forma) financial statements.

Other Indicators of Short Term Liquidity

1. Cash ratios:
cash + cash equivalents (from balance sheet)
total current assets (from balance sheet)
    a. Shows liquidity of current assets. The higher the ratio, the more liquid.
2. Current Liabilities
    a. Shows the ability to pay current obligations without waiting for conversion to cash of current assets such as inventories, receivables, etc. Sufficient cash is important to meet current obligations and operating requirements. There are many stories of businesses with sizeable amounts of assets that went bankrupt because they did not have enough cash to operate with.
3. Current Ratio Manipulation
    a. The firm may under abnormal circumstances, pay off debt.
     b. Inventory reduced below normal to pay off liabilities.
     c. Temporary advancements to officers recalled.
     d. Increased collection of receivables effort.
    
4. Payoff of liabilities and its impact on current ratio

     current assets   $100,000 $50,000
     current liabilities $80,000 $30,000
     current ratio     1.25      1.67
  
As can be seen from the example, a temporary payoff of liabilities greatly "improves" the current ratio.

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