Accounting Essay Example | Topics and Well Written Essays - 250 words - 18

Accounting - Essay Example This allows a realisation of how indebted a company is for its operations. Profitability ratios reflect on how much profit the company is earning based on its principal investment. More commonly, a breakeven point allows a tabulation of how much business the company needs to do to ensure that its start-up costs are met. Alternatively, the gross profit ratio reveals the expected profit outcomes resulting from the company’s regular business operations. The liquidity ratios determine how resilient a company would be in case of deficit financing. The current ratio reveals how much liquidity the company has to deal with its outstanding liabilities. On the other hand, the liquidity index shows how quickly the company can turn its assets into liquidity, if need arises. Finally, activity ratios describe how well managed the company is. Typically, the accounts payable and accounts receivable turnovers reveal how actively the management is closing liabilities (Wahlen, Baginski, & Bradsh aw,