Discussion Topic: You've looked at financial statements and might have found yourself thinking, "this is not...

Discussion Topic:

You've looked at financial statements and might have found yourself thinking, "this is not something a normal person does; businesses, yes, individuals, no." However, the information that surfaces from an overview of your financial standing (which is what financial statements provide) are in fact used in many personal situations.

Consider this, then share with the class a situation where you can see another person or business being interested in some of the information/ratios that can be obtained from a financial statement, and how that information can help or hurt you.

Solutions

Expert Solution

Some of the ratios/information that can be obtained from a financial statement is information with regards to liquidity and with regards to leverage. Both these ratios will help me to gauge my personal financial condition and help me to determine my present financial health as well.

The liquidity ratio like the current ratio will allow me to determine my ability to meet my short term obligations. As an individual I will be holding some current assets like cash, short term investments, etc. I will also have some current liabilities in the form of payables etc. When my current ratio is reasonable and my current assets exceed my current liabilities then this will mean that I have the liquidity and the ability to meet and pay for my current liabilities as and when they become due. This is indicative of a positive liquidity scenario.

Another ratio that will be helpful to me will be the leverage ratios like debt-equity ratio, debt-asset ratio etc. As an individual I will be holding debt in the form of auto loans, education loans, home loans etc. Use of excess debt is not good and for an individual having exposure to excess debt exposes that individual to re-payment risk. An individual should take only required and absolutely necessary debt and should take debt only when the individual will be able to pay back that debt at some agree point in time in future. The use of leverage ratios like the debt-asset ratio will be helpful for me to determine the risk exposure in my case due to usage of debt.

jeff jeffy answered 1 year ago

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