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Extraordinary Items and Ratio Analysis Part 2 Can you please describe some of the types of current assets and current liabilities? When we are calculating the ratios we need to determine which numbers to use in our calculation. Gross profit reflects the profit earned before the cost of goods sold but we must remember the net income is what we deliver to our shareholders at the end of the day. We must examine our expenses to determine if we need to reduce those expenses.
Some organizations only grow by acquisition’s. If this is a frequent occurrence for the organization how does this meet an extraordinary item? Please explain.
THIS WAS THE ANSWER TO PART 1
Breaking either positive or negative news to investors should be professionally handled. There is a need to ensure that good investor relationship is upheld for the sake of facilitating increased trust and increased investment opportunities (Lepta, 2003). Increased annual profit is one major event which is extraordinary. Investors are pleased when the organization makes profits, considering their increased wealth and profit maximization goals are achieved. In order to disclose such relevant and positive information, there is a need to have a proof of what is being highlighted, which could be presented in terms of financial statements. Another event that’s extra ordinary is the acquisition of another company. Investors are keen to support expansion strategies. Acquisition of another organization is an extra ordinary event. The capital base is increased, and the profitability of the organization will increase too. This event is presented through financial records as well, and a presentation of the plans set to achieve massive success and organization prosperity in the industry over the years.
The most important financial ratios that indicate the financial health of a company include the; current ratio and the gross profit. The gross profit shows the extent of profitability of the organization over the annual cost of sales, while the current ratio shows the relationship between current assets and the current liabilities in the organization (Tapaira, 2004). Should the gross profit and the current ratio change from one year to another, there are two positive outcomes which might be realized in the organization; first, the asset worth might have increased which is a good indication, and the profit levels could have dramatically increased which is also a good indication for the organization.
Liptak, B. (2003). Statistics for Evidence Based Practice and Evaluation. New York: John wiley and sons
Tapaira, J. (2004). Understanding Financial Statements. London: Cengage learning.