ACC 345 Module Two TYPED Summary Template

School: Boise State University - Course: ACC 345 - Subject: Accounting

ACC 345 Module Two Summary Template 1.Define the measurement of each type of ratio and the accounts included in the calculation. Refer to the Ratios tab. The first three ratios - current, quick, and working capital - are liquidity ratios and "are used to calculate a company's indebtedness" (Tamplin, 2023). In layman's terms, these ratios assess the company's current assets and current liabilities to determine whether they can cover their current debts. If not, the company is at risk of bankruptcy (Tamplin, 2023). Following the liquidity ratios come the activity ratios which focus on the company's ability to leverage its assets in order to generate revenues and cash (Kenton, 2020). These ratios are helpful for investors as they can compare two companies within the same sector or "one company's fiscal health over time" (Kenton, 2020). Coverage/Leverage ratios accomplish a few goals. It allows an assessment of the company's ability to cover debt and assesses operating expenses to gauge operating income (Hayes, 2020. Finally, profitability ratios "measures a company's ability to generate profits from its overall revenue figures by considering expenses or equity" (Tamplin, 2023). 2.Explain the significance of each ratio to the company. The liquidity ratios determine that Nike is solvent enough to pay their financial obligations as they come due (StockEdge, 2018). Furthermore, a positive working capital "indicates that a company can fund its current operations and invest in future activities and growth (Fernando, 2021).

Regarding the activity ratios - receivable turns, specifically - "a low ratio suggests a deficiency in the collection process" (Kenton, 2020). With higher ratios in this account, it suggests that the company is doing fine collecting payments from customers. However, with a low inventory turnover, it indicates the company may struggle with moving that inventory (Kenton, 2020). The positive profitability ratios indicate that the company has remained profitable year after year; however, the return on total assets and the net profit on revenues ratios are both declining. The company may want to evaluate if its product costs or SG&A costs can be decreased to maintain higher ratios in this area.