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FALL 2011
Horizontal
Vertical
A vertical analysis can be performed of either the income statement or the balance sheet item. In a vertical analysis, different
figures in a financial statement are compared to a specific figure
in the same accounting period and are reported as a percentage.
Trend
Ratio
(year to year)
(financial element
to financial
element)
(over a number
of years)
(key indicators
to other key
indicators)
FALL 2011
The same types of analyses are also used in the public sector to assess the financial
situation associated with a public sector entity. However, most analyses performed
by these entities relate to budgetary information and fund balances. Few analyses are
performed by public sector entities to determine the degree of liquidity or solvency.
Some ratios used to assess the financial health in these areas are computed
as follows:
Quick RatioThis ratio, also called acid test or liquid ratio, considers only cash,
marketable securities (cash equivalents) and accounts receivable because they are
considered to be the most liquid forms of current assets. A Quick Ratio less than 1.0
implies dependency on inventory and other current assets to liquidate short-term debt.
This ratio is calculated using the following formula: (Cash + Marketable Securities +
Accounts Receivable) / Current Liabilities).
Current RatioThis ratio is a comparison of current assets to current liabilities,
commonly used as a measure of short-run liquidity, that is, the immediate ability of an
entity to pay its current debts as they come due. Potential creditors use this ratio (typically greater than 2.0) to measure an entitys liquidity or ability to pay off short-term
debts. This ratio is calculated using the following formula: (Current Assets / Current
Liabilities).
Total Liabilities to Net Assets RatioThis ratio shows how all of an entitys
debt relates to the equity of the entity. The higher this ratio (preferably less than 1.0), the
less protection there is for the creditors of the entity. This ratio is calculated using the
following formula: (Total Liabilities / Net Assets).
Program
Sample
Findings
94%
81%
Can governance, risk, and compliance help agencies meet current and future
professional accounting certifications.
challenges? AGA members, federal stakeholders, and subject matter experts
were asked about the status of GRC in the public sector. The findings and
recommendations are shared in the latest AGA CPAG research report The Maturity
no matter where you
of GRC in the Public Sector: Where Are We Today? Where Are We Going?
are.
FALL 2011
MF_AGA2010WinterJournallAd_FINAL.indd 1
Jesse W. Hughes,
Ph.D., CGFM,
CPA, CIA, a
member of AGAs
Virginia Peninsula
Chapter and the
Journal Editorial
Board, is professor emeritus of
accounting from
Old Dominion University, Norfolk, VA,
and is a past member of the Board for the
International Consortium on Governmental Financial Management. He is an
international consultant on accounting
and auditing issues.
Meena Katwal,
MBA, computer
engineer, is an
international student from Nepal.
She is completing
her masters degree in accounting
at Old Dominion
University, Norfolk, VA.
FALL 2011
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.