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1 In the current economic environment, how can an accountant

1 In the current economic environment, how can an accountant/auditor use financial ratios to determine the financial health of an organization?

An accountant can use ratios to determine how much debt the company has compared to industry standards, the percentage of expenses to revenue, how solvent the company is, how liquid the company is. The auditor or accountant is looking for certain facts, including if the company were forced to close their doors tomorrow, how would the company handle their debts? How many assets can be turned into cash, to pay off creditors, to distribute to shareholders, etc. Financial ratios can also tell the auditor if the company can and should continue as a going concern - meaning, do they have enough money coming in to pay their bills, or are they starting to go under?

2 What ratios would be most appropriate to evaluate and why?

Definitely the liquidity ratios, which show how liquid the company is. Liquidity is important because it shows how quickly a company can convert assets to cash. Profitability ratios are also a set of important ratios, because they show how profitable the company is, and the profitability is also compared against industry standards, which shows if the company is more or less profitable, in the current economic environment, when compared to other companies in the same industry.

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1 In the current economic environment, how can an accountant/auditor use financial ratios to determine the financial health of an organization?

An accountant can use ratios to determine how much debt the company has compared to industry standards, the percentage of expenses to revenue, how solvent the company is, how liquid the company is. The auditor or accountant is looking for certain facts, including if the company were forced to close their doors tomorrow, how would the company handle their debts? How many assets can be turned into cash, to pay off creditors, to distribute to shareholders, etc. Financial ratios can also tell the auditor if the company can and ...

Solution Summary

1 In the current economic environment, how can an accountant/auditor use financial ratios to determine the financial health of an organization?

An accountant can use ratios to determine how much debt the company has compared to industry standards, the percentage of expenses to revenue, how solvent the company is, how liquid the company is. The auditor or accountant is looking for certain facts, including if the company were forced to close their doors tomorrow, how would the company handle their debts? How many assets can be turned into cash, to pay off creditors, to distribute to shareholders, etc. Financial ratios can also tell the auditor if the company can and should continue as a going concern - meaning, do they have enough money coming in to pay their bills, or are they starting to go under?

2 What ratios would be most appropriate to evaluate and why?

Definitely the liquidity ratios, which show how liquid the company is. Liquidity is important because it shows how quickly a company can convert assets to cash. Profitability ratios are also a set of important ratios, because they show how profitable the company is, and the profitability is also compared against industry standards, which shows if the company is more or less profitable, in the current economic environment, when compared to other companies in the same industry.

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