Alvarado Ltd., a private company, has reported increasing profit every year for the past five years. Alvarado
Question:
Alvarado Ltd., a private company, has reported increasing profit every year for the past five years. Alvarado would like to expand operations by adding three retail stores within the next three years, and is seeking a loan from its bank to help fund the expansion. In Alvarado's most recent statement of financial position (SFP), the company reported a positive cash balance and a healthy current ratio of 2. Alvarado's controller believes that a statement of cash flows “would not be useful to the bank manager in making their decision because Alvarado has a solid financial position and has had increasing profit every year for the past five years.” From the perspective of Alvarado's bank manager,
(a) Discuss the importance of positive cash flows,
(b) Discuss the purpose and usefulness of the statement of cash flows.
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a A business should have positive cash flows to finance expansion pay dividends and remain solvent d...View the full answer
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The current ratio is a financial ratio that measures a company\'s ability to pay its short-term obligations with its short-term assets. It is calculated by dividing a company\'s current assets by its current liabilities.
The formula for calculating the current ratio is:
Current Ratio = Current Assets / Current Liabilities
Current assets are assets that can be converted to cash within one year, while current liabilities are debts that are due within one year. A current ratio of 1:1 or greater is generally considered good, as it indicates that a company has enough current assets to cover its current liabilities. A current ratio of less than 1:1 may suggest that a company may have difficulty meeting its short-term obligations.
It\'s important to note that the current ratio is just one of many financial ratios that can be used to assess a company\'s financial health. It should be used in conjunction with other financial ratios and qualitative factors to make informed decisions about investing or lending to a company.
