Financial Accounting Seminar 5 – Solutions

Q 3 (Ch.5, p. 132)

The statement of financial position is of limited use. This is because of the limitations
of inconsistent valuations and missing assets. However, from the statement of
financial position it is possible to determine whether a business is liquid. By this we
simply mean that there are enough current assets to cover the current liabilities. If, for
example, the business had immediately to pay all its short-term creditors such as trade
payables, could it do so? This is measured by taking current assets and comparing
them to current liabilities. An even more short-term measure is the quick ratio. Here
current assets less inventories are compared to current liabilities. A statement of
financial position also tells us how much debt a company has in comparison to
owner’s capital.

Q 4 (Ch.5, p. 133)

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