Liquidity Ratios for GM and Ford Essay Example | Topics and Well Written Essays - 1000 words

Liquidity Ratios for GM and Ford - Essay ExampleFrom this paper it is clear thatthe higher the ratio the better it is for the company in system but this does not hold truth in the real world situation. Despite the current ratio being used extensively in monetary reporting, the ratio can be very misleading. In the real world situation, a high ratio does not necessary imply good liquid state position and a low current ratio does not necessary imply a bad liquidity position. This norm is contrary to the common notion of the current ratio as an adequate indicator of an entitys liquidity. The ratio conceptualizes liquidation as the ability of a companys current assets to equilibrium its current liabilities. In the real sense, this does not occur as the investors measure a company, s liquidity as the going concern of the entity.This essay stresses thatthe rootage company has longer accounts receivables days and a low inventory turnover. The second company has a short accounts receiva bles period and a higher inventory turnover. The basic company has a higher current ratio than the second company does but this does not imply that the company has a better liquidity position. This is because operative capital but the cash do not pay the current obligations and since it does not converts its current easily into cash the company is illiquid. The general concept and tush of the quick ratio is similar to that of the current ratio as it gives the users of the ratio an idia to determine the companys ability to offset its short-term obligations using its short-term assests.