College of St.

John Paul (II) Arts and Sciences

Fundamentals of Accounting 1 & 2

Name: Gabriel M. Burguita Score:

Instructor: Mr. Dionisio L. Robles MBA Date: 12/2/2022

ACTIVITY 15
1. What does current ratio of 1.2 mean?
➢ The current ratio compares a company's current assets to its current
liabilities. This means that the company expects to collect cash from those
who owe it money and to pay those who owe them money on time. And
having a current ratio of 1.2 means that a company may have unhealthy
business since it is near to 1 unless it became 1.5 to 2 that we can considered
it healthy.
2. How do you calculate current ratio example?
➢ We can calculate current ratio using this formula, current ratio equals
Current Assets divided by Current liabilities.
3. What happens if the current ratio is too high?
➢ If the current ratio is too high it indicates that the financial assets of an
entity is not being used effectively and efficiently. Even though having a high
current ratio is advantageous, it can turn unfavorable if a company can’t
manage their asset efficiently.
4. How do you explain financial ratios?
➢ Companies use ratios to compare themselves. They assess stocks within
a specific industry. Similarly, they compare a company's current numbers to
its historical numbers. In most cases, understanding the variables driving
ratios is also important because management has the flexibility to change its
strategy to make its stock and company ratios more appealing. In general,
ratios are used in conjunction with other ratios rather than alone. Knowing
 the ratios in each of the four previously mentioned categories will provide
you with a comprehensive view of the company from various perspectives
and assist you in spotting potential red flags. And a company use ratio
analysis to measure the entity’s liquidity, solvency and operational
efficiency.
5. What are the weaknesses of financial ratios analysis?
➢ Some weaknesses of financial ratio analysis are since the information
focuses on its historic data, the financial information may be not current
which is disadvantageous because it does not consider the changes in
external factor of the company such as recession. Moreover, financial ratio
is quite complicated due to the fact that there are certain limitations for ratio
analysis as it only considers quantitative aspects and fully ignores the
qualitative aspects, it does not take into consideration the reasons for
fluctuation of amounts due to which results may not be appropriate.