Purpose of the Analysis:A finance director needs to assess whether the organization has enough funds available to cover short-term obligations (bills due within 30 days). This requires evaluating liquidity.
Explanation of Key Ratios:
Quick/Current Ratio: Measures an entity’s ability to pay its short-term liabilities using liquid assets.
Current Ratio= Current Assets ÷ Current Liabilities.
Quick Ratioexcludes less liquid assets (e.g., inventory), focusing on assets that can quickly convert to cash.This is the appropriate measure for assessing immediate liquidity.
Receivables Turnover Ratio: Measures how efficiently receivables are collected but doesn’t directly evaluate liquidity for bills due within 30 days.
Budgetary Cushion Ratio: Refers to financial reserves relative to annual spending, not short-term liquidity.
Debt Burden Ratio: Evaluates debt relative to revenues but does not address immediate cash flow needs.
[:, Government Finance Officers Association (GFOA),Liquidity Management Best Practices., Association of Government Accountants (AGA),Financial Statement Analysis for Government Finance Officers., ]
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