By Michael Greener
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Extra info for Between the Lines of the Balance Sheet. The Plain Man's Guide to Published Accounts
In order to spread the incidence of taxation more evenly over the whole of an asset's life, additional amounts in lieu of tax are reserved from profits in the early years and made available for meeting tax demands in later years. It has been noted that stock refers to raw materials and finished goods, whereas work-in-progress refers to goods in course of production. A point to remember, and which will assume a greater degree of importance as the argument proceeds, is that both these items are difficult to value for balance sheet purposes.
The case of Imperial Tobacco has already been discussed. Courtaulds have suffered a fall in the current ratio and a slight drop in the liquid. Neither calls for much comment, particularly as these both seem to have now levelled out. I. The case of Lancashire Cotton Corpn. is more interesting. I. Imperial Tobacco Courtaulds ♦Lancashire Cotton Corpn. I. Imperial Tobacco Courtaulds ♦Lancashire Cotton Corpn. George Wimpey Harland & Woolf Newton Chambers William Hancock ratios are unusually high. There is no apparent reason for running a present liquid ratio of 4-6.
Of Trade. The more important comparison is between successive years. Watch, for example, the trend of a ratio in the business being reviewed. Presuming balance sheets are available for more than one year (note that because of comparative figures all balance sheets cover two years), the current ratio can be calculated over a period, and the way it is moving noted. So also with the liquid ratio. What are the trends to look for? Here again it is difficult to be precise. The ratio may be doing one of three things.