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Because there is non cash expenses impact on profit like (Depreciation Expenses) That mean there is no Cash flow out and current Assets will not reduce
Because there is non cash expenses impact on profit like
Another usual manipulation of Current ratio is when the company deliberately apply and received a significant amount of cash(long term loan) in the current year and pay off the loan in minimal installments. So, it will increase their current assets while no effect on current liablity--the result sound current ratio.
That because there is no cash expenses impact on profit such as depreciation expenses.
The Loss may due to various book entries which might have not actually paid by Cash -rather credited to the owner's/ Partner's Capital instead of showing that as a Current Liability (eg. Rent for Office/ Owner's Salary/ Interest on Capital ) or by nature itself it could be Non-Cash like Depreciation all are debited to P& L which lead to Loss and Credited to Liability A/c (Non-Current -- Owner's Capital /Current A/c) or Adjusted with Fixed Assets in case of Depreciation.
Since Cash is not affected Current Assets will show a good Number as well Current Liability not increased as the liability booked under Long Term - Capital A/c or Adjusted with Fixed Assets
A good Current Ratio is Eq or More than1 which followed by Companies those who tied the enormous current assets in small investments rather than invest them on long term - Say for eg.. Huge inventory could be avoided which is maintained by the company for some reason - would give Good Current Ratio only Financial Soundness //strong Current Ratio - means it can meet the liabilities without fail when it comes due, as well on the basis of its Net worth. Clarify me whether my understanding is right?
we have to check with the cash flow in this case as it seemd there is non cash expense that is counted as expense paid in cash ( like depreviation ..etc ) but actuall it is not , also they we have to check the non current ( asset or liabilty ) may be we use the non current liabilty to finance the current asset and it will be huge problem ,and operation ratio and liquidity ratio to analysis this company
Funds are not using proportiantly in revenue generating activities and due non cash expenses in P & L statement - reason for loss
1.There may be only production and no sales...so this reflects stock on hand in Balance Sheet
2. The enterprise might issued shares to acuire capital.
3.Non cash items may not have been taken into account..
4. Balance sheet may be shwd huge debtors.
* company may run in loss due to huge opertation & direct cost * Company might be intial years of its operation and offseting prelimnary expences* there may be no or less cash expense and the income statement mostly consist on depriciation and prelimnay expences* Company might have huge internal financing as compare to outside's short term liabilities and on other hand company use to accumulate depriciation rather to offset from assest
"Company running in loss, but financially sound - current ratio is sound enough" possible fro short run only :-
Since Financial soundness is measured by balance sheet ratios and it is possible for the comany that comany comapany showing good finacial staus menas current ratios and financial ratios of balalnce sheet but on the other hand comapny having losses because of non cash expenses .....
