In this episode, we review the key accounting events during the past year, and also discuss the key metrics for liquidity. Key points discussed concerning accounting events are:
Enron and Worldcom jail terms were handed down.
There were a series of stock option manipulation frauds.
FIN 46 was issued, involving off-balance sheet reporting requirements.
Issues with the existing lease and pension accounting standards were discussed.
The industry dealt with ongoing complaints about the requirements of Sarbanes-Oxley section 404, pertaining to systems of control.
Key points relating to the metrics for liquidity are:
The quick ratio is better, since it removes inventory from the calculation.
A comparison of sales to assets can be plotted on a trend line; the proportion should be about the same over time.
The days of working capital ratio indicates the amount of working capital needed to support one day of sales.
A comparison of sales to inventory can be plotted on a trend line, to indicate the ongoing investment level of a business in inventory.
The accounts payable days measurement can be plotted on a trend line to highlight any changes in payables duration.
The risky assets conversion ratio shows the percentage of low-value assets on a company’s balance sheet.