Ratio Analysis Question Among the ratios that were mentioned in the lecture, I was already familiar with the applications of current ratio and quick ratio. The current ratio indicates the relation between its current assets and current liabilities which signifies a particular business organization’s capability to satisfy its liabilities with the virtue of its acquired current assets to an extent. The main utilization of current ratio lies in the profitability of a business organization. It is generally computed as current assets divided by current liabilities (Drake, “Financial Ratio Analysis”).
On the other hand, the quick ratio is the relation of quick assets towards current liabilities. Fundamentally, ratio of quick assets is computed as current assets less inventory or stock. However, quick ratios signify a particular business organization’s capability in order to satisfy current liabilities with its major liquid asset such as stock (Drake, “Financial Ratio Analysis”). The main execution of quick ratio lies in quick utilization of current assets within a business organization by subtracting the value of inventory or stock out of the sum total of current assets.
It is generally calculated by subtracting inventory or stock from current assets which is again divided by current liabilities (Saleem & Rehman, “Impacts of Liquidity Ratios on Profitability”). Hence, the current ratio of a business is mainly used in satisfying its current liabilities with the virtue of its acquired current assets. On the other hand, the quick ratio of a business organization is mainly used in satisfying its current liabilities with its major liquid asset such as stock. Question 2 In the year 2010, in lieu of financial performances, Microsoft Corporation’s revenue attained a high margin of $62.5 billion which signifies that there is an increase of 7% as compared with the previous financial year i. e.
2009. In this connection, the operating earnings of Microsoft eventually rose by 18% to $24.1 billion (Microsoft Corporation, “2011 Annual Report”). It has been noted that in the year 2010, Microsoft’s total assets amounted to $86,113 million along with long term obligations of around $13,791 million. It is clear from this financial implication that in the year 2010, Microsoft possessed more value in its total assets compared with its long term obligations.
The total current assets of Microsoft in the year 2010 amounted to $55,676 million and the total current liabilities amounted to $26,147 million. Hence, the current ratio of Microsoft in the financial year of 2010 was approximately 2.13. In the year 2009, the total current assets amounted to $49,280 million and the total current liabilities amounted to $27,034. Hence, the current ratio of Microsoft in the financial year 2009 was approximately 1.82 (Microsoft Corporation, “2010 Annual Report”). Hence, it can be apparently noticed that the current assets of Microsoft Corporation in both financial years of 2010 and 2009 remained almost higher than the organization’s current liabilities.
In this connection, the current liability of Microsoft Corporation remained high only in the year 2009 and not in 2010. Though the current liability decreased, the current ratio of Microsoft Corporation remained positive in both financial years. Thus, the above mentioned interpretations eventually indicate Microsoft Corporation’s improvement as a financially strong company, particularly for the fiscal year 2010 in comparison to 2009. References Drake, P. P. “Financial Ratio Analysis”. February 08, 2012.
Measures of Liquidity, No Date. Microsoft Corporation. “2011 Annual Report”. February 08, 2012. Financial Highlights, 2011. Microsoft Corporation. “2010 Annual Report”. February 08, 2012. Balance Sheets, 2010. Saleem, Q. & Rehman, R. U. “Impacts of Liquidity Ratios on Profitability. February 08, 2012. Introduction, 2011.