CHAPTER I

INTRODUCTION

The availability of cash in the day to day operation of a business is one of the vital components of a
good flow of operations. A business encounters decision that they must make like how many inventories to
purchase this month and the number of employees to hire. These decisions require cash availability because
queries like where will the business get the cash it needs to pay the salaries of its employees or like where to
get the cash needed to pay currently maturing payables and the like if there is an emergency need for cash
due to business opportunities that randomly appears. Cash must always be present and readily available for
use to improve the flow of a business operation. Also for the financial growth of the company, it is essential for
the entity to have the power how their assets, liabilities and equity must work to provide good management.
Seeing how companies struggle to obligations. One factor or weakness that an entity has is: Bad Management.
Bad management leads to bad investments, poor decision skills and lacks obligatory support on which good
management is needed to have high liquidity ratio which therefore concluding to good flow of business. Bad
management leads to failure to acquire good investment or the actual opposite. Second is: Liabilities, Liability
which is one factor that an entity might go bankrupt (the liability is actually higher than the total assets) or
liquidation in accounting terms is a sudden black out because it can happen anytime, an entity can be a
candidate of being sue by a creditor if the terms cant be paid at the right time or to make it easy, wont pay or
agree to a certain agreement. Of course, its a hierarchical effect if you have bad management then its no
surprise if you are a candidate of bankruptcy. Lastly, the flow of economic value which affects all entity. A
sudden change of economic value will have to make its management go in a different way, a different mindset
or what we call strategy to provide maximum efficiency. Failure to have those three factors will surely have a
good establishment and can expect even worse scenarios that an entity can handle. The study approaches on
how assets can suffice the liability. How the liability will be paid, what certain methods are effective to improve
these accounts. The life of an entity is depended and evaluated by these three, and what mentioned earlier will
be inserted again here. It is a hierarchical manner on which good is really good and what is bad is really bad.
There are miracles in business but its only of a few percentage. Assets, Liabilities and Equity, What this
introduction aims is for the liability and the asset. And were talking about the LIQUIDITY of the company we
have chosen. When we talk about Liquidity of an entity and inserting the technical fact about it. Its about how a
company or a business will pay its short term debts and how this ratios will affect the investments coming from
other companies and will improve its way to the stock market. In a very easy way, a good liquidity ratio is like
having good grades in your financial reports and statements.

CHAPTER II
REVIEW OF RELATED LITERATURE AND STUDIES

According to Wiley (2012) The liabilities are displayed on the statement of financial position in the order of
payment. Current liabilities are obligations, the liquidation of which is reasonably expected to require the use of
existing resources properly classifiable as current assets, or the creation of current obligations. Obligations that
are on demand or which are callable at any time by the lender are classified as current regardless of the intent
of the entity or lender. Current liabilities include obligations arising from the acquisition of goods and services
entering the operating cycle (e.g. accounts payable, short-term notes payable, wages payable, taxes payable,
and other miscellaneous payables). Collections of money in advance for the future delivery of goods or
performance of services, such as rent received in advance and unearned subscription revenues. Other
obligations maturing within the current operating cycle to be met through the use of current assets, such as the
current maturity of bonds and long-term notes. The distinction between current and noncurrent liquid assets
and liabilities generally rests upon the ability of the entity and the intent of the entity to liquidate or not to
liquidate within the traditional one-year concept.

According to the FASB ASC Master Glossary (2013), current assets are cash and other assets or resources
commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during
the normal operating cycle of the business. However, when the operating cycle exceeds one year, the
operating cycle will serve as the proper measurement period for purposes of current asset classification. When
the cycle is very long, the usefulness of the concept of current assets diminishes. The concept of the operating
cycle being longer than one year for a not-for-profit organization is valid, although in practice, an operating
cycle of more than one year for a not-for-profit organization would be a rarity. Cash and cash equivalents
including cash on hand consisting of coins, currency, and undeposited checks; money order and drafts; and
deposits in banks. Anything accepted by a bank for deposit would be considered as cash. Cash must be
available for a demand withdrawal. Assets such as certificates of deposit would not be considered cash
because of the time restrictions on withdrawal. Also, cash must be available for current use in order to be
classified as a current asset. Cash which is restricted in use and has restrictions that will not expire within the
operating cycle, or cash restricted for a noncurrent use would not be included in current assets. Cash
equivalents include short-term, highly liquid investments that are readily convertible to known amounts of cash.

(Short term debts to total assets) a study

Two Major Types of Bankruptcy

The U.S. Securities and Exchange Commission states that under Chapter 7 of U.S. Bankruptcy Code "the
company stops all operations and goes completely out of business. A trustee is appointed to liquidate (sell) the
company's assets, and the money is used to pay off debt". The investors, or creditors, who take the least risk
are paid first.
For example, investors who take a relatively reduced risk in the company by purchasing corporate bonds must
forgo the potential of seeing any excess profits the company may earn in the future. For the higher safety of
the bonds, the investors agree to receive, at most, their specified interest payments. Equity holders, however,
have the full potential of seeing their share of the company's retained earnings, which would be reflected in the
stock's price. But the tradeoff for this possibility of boosted returns is the risk that the stock may lose value. As
such, in the case of a Chapter 7 bankruptcy, equity holders may not be fully compensated for the value of their
shares. In light of the risk-return tradeoff, it seems fair (and logical) that shareholders are second in line to
bondholders when a bankruptcy does occur.
(higher liquidity ratio) a study

Liquidity ratios are used to determine a companys ability to meet its short-term debt obligations. Investors
often take a close look at liquidity ratios when performing fundamental analysis on a firm. Since a company
that is consistently having trouble meeting its short-term debt is at a higher risk of bankruptcy, liquidity ratios
are a good measure of whether a company will be able to comfortably continue as a going concern.
Any type of ratio analysis should be looked at within the correct context. For instance, investors should always
look at a companys ratios against those of its competitors, its sector and its industry and over a period of
several years. In this issues Fundamental Focus, we investigate liquidity ratios using time-series analysis,
competitive analysis and sector and industry analysis.