Business – 10.2 Analysis of published accounts – Liquidity ratios | e-Consult
10.2 Analysis of published accounts – Liquidity ratios (1 questions)
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Answer:
- Increase in current liabilities: The firm may have taken on more short‑term debt or accrued larger payables, raising the denominator of the ratio.
- Decrease in current assets: A drop in cash, receivables, or inventory (perhaps due to slower sales or tighter credit control) reduces the numerator.
- Asset re‑classification: Some assets might have been re‑classified as non‑current (e.g., long‑term investments moved out of current assets), lowering the ratio.
Implications:
- Creditors: A falling ratio suggests higher liquidity risk, potentially leading them to increase interest rates, demand collateral, or shorten credit terms.
- Investors: The decline may raise concerns about the company’s ability to fund operations without external financing, possibly affecting share price and the firm’s cost of capital.