Red Company: Chapter 5 Cont.

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Red Company: Chapter 5 Cont.

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Lecture Note
Miami University, Oxford
Acc 221 - Intro to Financial Accounting
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Lecture 39 Outline of Previous Lecture  Section 38: Red Company: Chapter 5  Chapter 5 o Liquidity indicators o Statement of cash flow indicators o Equity investor indicators Outline of Current Lecture  Section 39: Red Company: Chapter 5  Chapter 5 o Liquidity o Balancing Act o Keeping Cash Current Lecture  Section 39: Red Company: Chapter 5 cont.  Chapter 5 cont o Liquidity  Any company that is for profit aims to create a return on investment for owners and investors  Before getting a return, company must be able to pay all of their bills  Liquidity – the ability of a company to pay its bills in short term; the ability to pay current liabilities with current assets  If a company is not very liquid, investors and owners do not have to even worry about DuPont, because they will have no return  Working = more liquid  The more current assets there are, the greater the ability to pay liabilities  Quick Ratio does not include inventory o Balancing Act  Too high, more assets will diminish the financial performance of the company, not allocating funds effectively  Too low, company cannot pay current liabilities  Current ratio  $1.50 good liquidity  $3 too high liquidity  Quick ratio  $1 or more is good liquidity  Conservative estimate on liquidity ACC 221 1st Edition

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