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Defects and improvement of corporate short-term solvency analysis indicators

Author: HuAnZuo From: www.yourpaper.net Posted: 2009-03-31 22:56:40 Read:
[Abstract] corporate short-term solvency of the enterprise's ability to repay its debts as they become due in the short term, to reveal the size of the financial risk. But the short-term solvency analysis indicators have many defects, does not adequately reflect the risk of the existence of the business, so it is necessary to re-examine and improve and perfect the current short-term solvency analysis indicators to enhance solvency analysis the practical value of the indicator.
[Words] corporate short-term solvency Current ratio Quick ratio

In the face of uncertainty and risk in the market economy environment, the financial environment and our way of managing money there are more hidden risks, which requires financial analysis should be considered from the point of view of safety and soundness. As an important part of the financial analysis, corporate short-term solvency is through the realization of the current assets to repay maturing debt, reflects the enterprise's ability to repay its debts as they become due in the short term, to reveal the size of the the enterprises existing financial risk. But in the face of complex and volatile business environment, the short-term solvency analysis indicators show many defects does not adequately reflect the risk of the existence of the business, it is necessary to re-examine the analysis of the current short-term solvency indicators and improved, and to enhance the practical value of the firms' solvency analysis indicators.

A defect exists in the corporate short-term solvency analysis

Enterprises to the sustained and healthy development of the security is a basic premise, the robustness is reliable protection. Security embodied in the enterprise it is necessary to arrange a good maturity financial burden, as well as relatively stable cash flows. That is, the security requirements of enterprises must have a certain point in time on the solvency of that static, while solvency is usually the accumulation of earnings and cash flows that dynamic. Soundness requires companies cautious uncertainties in operating activities to fully assess the risks and losses, its essence is to maintain and be maintained as a core corporate solvency capital. It can be seen, our analysis following defects exist in the corporate short-term solvency.
1, the short-term solvency analysis is built on the basis of liquidation rather than on the going concern basis of
Production and operation of enterprises, as well as the accounting policies adopted are based on the going concern assumption, and it shows that the enterprise exists not to liquidate the assets it holds to the normal operation of the debt owed to the normal repay. China's current analysis of the short-term solvency is to establish the liquidation sale of the existing assets of the enterprise on the basis of, and that should the current liabilities by current assets of the enterprise (or liquid assets) for protection, which is precisely enterprise security neglect. Enterprises to survive and develop, it is impossible to Realisation of all current assets to pay all current liabilities. Otherwise, it means that the companies into liquidation, the going concern basis for the liquidation basis of replaced. In addition, to continue as a going concern enterprise debt to rely on corporate stable cash flows, so the short-term solvency analysis does not include the analysis of corporate cash flow also biased.
2, the existing short-term solvency analysis indicators are static rather than dynamic
From the existing short-term indicators of solvency analysis, static indicators is a cure, often focus only on the solvency of a particular point in time, can not reflect the future flow of funds from the dynamic. For example, short-term solvency analysis indicators calculated from the balance sheet are de facto indicators can only express business at a particular moment all available state resources and the need to repay debt or stock, and the future flow of funds there is no causal relationship . To liquidate its assets and debt repayment is dynamic. If you focus only on the static results, it will ignore the solvency of the companies in the business activities.
Existing short-term solvency analysis did not fully reflect the substance over form and soundness of the principle
Existing corporate short-term solvency analysis index system, the current assets and current liabilities content just on the balance sheet of "copy", and did not consider the substantive relationship between the hide all their assets and liabilities, and does not fully reflect The potential liquidity factors in the balance sheet. Corporate existence of a large number of unused bank line of credit, you have the long-term assets can be realized immediately, whether it has a good long-term financing environment, and whether there is a large amount or liabilities and guarantees and other matters, these factors in the calculation of the current ratio and speed are not reflected in the dynamic ratio. Meanwhile, in the use of these two indicators of the current ratio and quick ratio analysis of short-term solvency, there overestimate the quality of current assets, does not take full account of the quality of corporate current assets. If also uncollectible receivables as a guarantee of the debt service will make short-term solvency of enterprises lack credibility. Long-term backlog of goods and materials, its actual value is significantly lower than the book value. In addition, in the calculation of the quick ratio rigid inventory full amount is neither scientific nor reasonable.
4, the numerator and denominator of the valuation basis of inconsistencies, each represent future cash flows are not comparable between
The two indicators in the denominator (current liabilities) Usually the final value calculated by maturity the molecule (current assets, liquid assets) using a variety of valuation methods denominated. Inconsistent valuation basis of the numerator and denominator, is bound to weaken the reliability of the analysis results in a certain degree, especially when the historical cost of the assets and away from the future value of the difference is larger.
5, liquid assets, the definition is not uniform
Defined as current assets - Inventories (2002 rules for the operation of corporate performance evaluation (Amendment) "); defined as current assets - Inventories - Prepayments - prepaid expenses" (Wang Qingcheng editor of the Financial Management ") ; defined as current assets - Inventories - Prepayments -1 due within one year of non-current assets - Other current assets "(2007, the accounting technical qualification examinations resource materials" financial management "), this often leads to quick ratio The calculation of different diameter, is bound to affect the comparability of the indicators.
6, not to consider the particularity of advances from customers
Receipts in advance pin money, corporate pre-charged to customers are classified as current liabilities. But this liability does not need to be repaid in cash simply inventory reimburse, therefore it is the impact of short-term solvency and other liabilities.
7, with the whitewash effect
Business managers in order to show a good short-term solvency indicators, by falsifying accounts receivable, less bad debt provision in advance to confirm sales revenue and deferred cost of sales carried forward to increase inventory profit mode of operation to distort the current ratio (or quick ratio). In addition, businesses can take to defer credit purchases of goods and temporary debt to artificially whitewash liquidity ratio (or quick ratio), misleading information users.
8, although corporate short-term solvency is quite robust, but different enterprises or the same business in the cash flows from operating activities in different accounting periods, the gearing ratio of cash flow analysis of the cash flow from operating activities in the horizontal and vertical comparable sex are larger defects
Such as the production of a single product, enterprises in the growth stage, due to loose credit policy, the net cash flow of operating activities may appear negative, this situation is still normal. But still not normal negative products entering the mature stage. Robust enterprise and expand enterprises due to the different financial strategies, both operating cash flows will be different. For these different situations, if we are stereotyped by operating activities Net cash flow analysis will inevitably unfair.

Second, analysis of the current short-term solvency indicators improved

As can be seen from the above analysis, the short-term solvency analysis indicators increasingly difficult to adapt to the actual needs of the enterprise, can not fully and effectively evaluate the short-term solvency. In view of this, the corporate short-term solvency analysis indicators more accurate, comparable and credible, I think that should be corrected, supplemented and improved.
1, an accurate definition of liquid assets calculation caliber
Liquid assets should really grasp readily realizable assets should not be loosely defined as current assets net of certain items. Constituting should: Liquid Assets = monetary funds short-term marketable securities excluding notes receivable due from related companies aged less than one year and excluding net receivables due from related companies liquidity Strong net inventory.
2, should the current ratio calculated using the historical cost of inventories and the use of replacement cost or current cost comparison
Current ratio calculated at replacement cost or current cost more than the original value, namely that the short-term solvency of the enterprise can be enhanced, and vice versa weakened.
Calculated flow (speed) dynamic ratio of receivables should be aging one by one classification are translated in order to analyze its realization
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