Write short notes on any two of the following: (10 marks)
(a) Liquidity-Profitability Tangle.
(b) Lease financing
(c) Modem approach to financial statement analysis
Answers
Explanation:
a) Liquidity means one’s ability to meet claims and obligations as and when they become due.
In the context of an asset, it implies convertibility of the same ultimately into Cash and it has two dimensions in it, viz., time and risk.
The time dimension of liquidity is concerned with the speed with which an asset can be converted into Cash. Risk dimension is concerned with the degree of certainty with which an asset can be converted into Cash without any sacrifice in its book value.z
Viewed from this angle, all assets will have a degree of liquidity and assets that comprise of cash and ‘near cash’ items are most liquid assets. In the context of a firm, however, liquidity means its potential ability to meet obligations.
In the opinion of Solomon, E., and Springle, J., whenever one speaks of a firm’s liquidity, he tries to measure the firm’s ability to meet the expected and unexpected Cash requirements, to expand its assets, to reduce its liabilities or cover any operating losses. Financial position of a firm is considered to be solvent provided it has adequate liquidity.
b) Lease financing is a contractual agreement between the owner of the assets (lessor) and user of the assets (lessee), whereby the owner permits the user to economically use the asset on the payment of periodical amount which is in the form of lease rent for a specific period of time. The title of goods remains with the owner (lessor) of the asset. It is the most important source of long term financing.
Lease agreement is a written agreement and also known as lease deed which starts the legal relationship between the owner of the assets, called lessor and user of the assets, called lessee. Under the leasing agreements, the company acquires the right to use the asset without holding the title to it.