- Put the following assets in order of liquidity: accounts receivable, inventory, cash, and marketable securities.
Current assets which include cash and other assets that could easily be converted into cash within the operating cycle of a business are usually listed in order of liquidity (Keown 4). All assets have the ability to generate some cash in some way but other assets are more liquid than others. The above mentioned assets would be listed in the following order:
- Cash- No other asset is more liquid than cash. Cash is how a business meets its obligations which range from rent, wages, utilities and taxes. It is used for general business purposes.
- Marketable securities- They are security investments that a firm can easily convert into cash balances. They are a cash equivalent as they can be converted into cash through selling. They are also called the near-cash assets.
- Account receivables- They are amounts owed to the firm and are evidenced on the balance sheet by notes. They are the customers/clients unpaid bills. They represent a sale that has already taken place and only waiting for customers to settle up.
- Inventory- An inventory is turned into cash through a sale to a customer. Customers must first be found before a sale can take place. Sale and payment accounting events have to take place before an inventory is turned to cash.
- Describe the difference between the Excess of Revenues over Expenses and the Increase in Unrestricted Net Assets.Excess of revenues over expenses or net revenues is the difference between total revenues and the total expenditures. A positive number indicates an operating surplus whereas a negative number reflects an operating deficit (Zietlow et al. 8). For a non-profit organization, If a donor does not specify a certain restriction on his or her contribution, the amount received by the organization is recorded as unrestricted contribution revenues. Unrestricted contribution revenues on the other hand would cause the amount of unrestricted net assets to increase.
- Why must organizations disclose their accounting policies in the notes to the financial statements?
Notes are used to explain the significant accounting policies and also provide a disclosure of other information that may not be contained in the financial statements (Finkler et al. 4). Notes are used to provide a further understanding of the financial statements. Under the generally accepted accounting principles (GAAP), organizations must disclose their accounting policies in notes to the financial statements to reveal the various choices such as how investments are valued and how income taxes are paid among many other choices. Financial statements only show an organization’s pas t performance. However, activities such as lawsuits, contingencies and other commitments may have an impact on an organization’s financial status. The full disclosure principle makes it a requirement for organizations to provide such information (Zietlow et al. 10).
- Describe three different types of benchmarks used in ratios.
Ratios provide comparisons and the comparisons between any two numbers can provide useful information to a company. However, ratios do not have a specific value and hence organizations must use benchmarks to assess their current financial position. Benchmarks provide comparisons to an organizations previous performance, specific competitors and industry wide competition (Finkler et al. 2013). Some of these benchmarks include:
- Liquidity ratio- They are used to determine whether an organization is maintains the appropriated amount of cash. Too little cash may mean an increase in costs for financial obligations while too much may mean long term investment opportunities.
- Efficiency ratios- They are used to determine whether the organization is performing efficiently. They are used to measure the handling of accounting receivables, accounting payables and total assets.
- Profitability ratios- Profitability ratios are used to assess an organization’s performance given the prevailing risks. Profitability ratios are a key marker of an organization’s performance.
Finkler, S., Ward, David M., Calabrese, Thad D. Accounting Fundamentals for Healthcare Management.2 ed. Jones & Bartlett Learning 2013. Print.
Keown, Arthur J. Financial Management: Principles and Applications. Upper Saddle River, N.J: Pearson/Prentice Hall, 2005. Print.
Zietlow, John T, Jo A. Hankin, Alan G. Seidner, and Jo A. Hankin. Financial Management for Nonprofit Organizations: Policies and Practices. Hoboken, N.J: John Wiley & Sons. Inc, 2007. Print.