A business has received the following information from their accounting firm - HSC - SSCE Business Studies - Question 18 - 2001 - Paper 1
Question 18
A business has received the following information from their accounting firm.
Current ratio
2000 0.8 : 1
2001 1.4 : 1
Debt to equity ratio
2000 1 : 1
2001 1.5 : ... show full transcript
Worked Solution & Example Answer:A business has received the following information from their accounting firm - HSC - SSCE Business Studies - Question 18 - 2001 - Paper 1
Step 1
Current ratio in 2001 compared to 2000
96%
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Answer
The current ratio increased from 0.8:1 in 2000 to 1.4:1 in 2001. An increase in the current ratio indicates improved liquidity, as the business has more current assets to cover its current liabilities.
Step 2
Debt to equity ratio in 2001 compared to 2000
99%
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Answer
The debt to equity ratio increased from 1:1 in 2000 to 1.5:1 in 2001. An increase in this ratio suggests a decline in solvency, as the business is taking on more debt relative to its equity.
Step 3
Conclusion on financial position
96%
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Answer
Given that the liquidity has improved (increased current ratio) but solvency has decreased (increased debt to equity ratio), the correct answer is (B) Increased liquidity and reduced solvency.
