Question: Discussion 5a: After calculating the current ratio for an entity and finding that the ratio's value was 1.5, a student analyst decided that the company

Discussion 5a:

After calculating the current ratio for an entity and finding that the ratio's value was 1.5, a student analyst decided that the company was in a sound position for paying its current liabilities.

Discuss the shortcomings of making such a conclusion.

Discussion 5b:

In analyzing the financial statements of an entity, the following ratios were calculated:

2015 2016

Current ratio 2:1 1:3:1

Quick ratio 1:1 0:7:1

Receivable turnover 30 days 45 days

Inventory turnover 3 times 4 times

Profit margin 10% 7%

Discuss any potential weaknesses that these ratios may reveal in the overall performance of the entity, and comment on possible causes for these results.

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