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 : 1 Which of the following would describe the financial position of this business in 2001 compared with 2000? (A) Increased liquidity and increased solvency. (B) Increased liquidity and reduced solvency. (C) Reduced liquidity and increased solvency. (D) Reduced liquidity and reduced solvency.

SSCE HSC Business Studies Processes of financial management: A business has received the foll

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 20... 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 comparison

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Answer

The current ratio measures a company's ability to pay short-term obligations. In 2000, the current ratio was 0.8:1, indicating that for every $1 of liability, there was only$ 0.8 in current assets. In 2001, this ratio improved to 1.4:1, suggesting that the company has significantly increased its liquidity and is better positioned to cover its current liabilities.

Step 2

Debt to equity ratio comparison

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Answer

The debt to equity ratio assesses a company's financial leverage. In 2000, the ratio was 1:1, indicating a balance between debt and equity. By 2001, this ratio increased to 1.5:1, suggesting that the company has taken on more debt relative to equity, which indicates reduced solvency.

Step 3

Conclusion

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Answer

In summary, the business's financial position in 2001 compared to 2000 shows increased liquidity (improved current ratio) but reduced solvency (increased debt to equity ratio). Therefore, the correct answer is (B) Increased liquidity and reduced solvency.

A business has received the following information from their accounting firm - HSC - SSCE Business Studies - Question 18 - 2001 - Paper 1

Worked Solution & Example Answer:A business has received the following information from their accounting firm - HSC - SSCE Business Studies - Question 18 - 2001 - Paper 1

Current ratio comparison

Debt to equity ratio comparison

Conclusion

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