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Liquidity Ratio and Its Effect to Profitability of Edna V.

Baculo (EVB) Bookkeeping

A Thesis Presented To
The Faculty of the College of Business Administration
Lyceum of the Philippines University-Batangas

by:

Hernandez, Dianne B.
Almeda, Reuvert Troy U.
Arranguez, Denna
Cuevillas, Clarice A.
Custodio, Michelle S.
Mercado, Grachelle
Sebastian, Van Angeline S.
and
Dr. Filomena M. Mendoza

2017

INTRODUCTION
The company has the main purpose of achieving a profit or produces profit.
According to Khaldun (2014), profit is an echo of the success in executing the activities
and operations of the organization. As per Grimsley (2014), profitability figures out if a
business stays in business. It is the capacity of a business to procure a profit. The
activities of the company influence the profit to be acquired by the company. A good
profit growth is growth in accordance with the development of the economy. With a
better profit growth, survival and advancement of the organization can be better.
One of the most important factors of looking the companys financial position is
liquidity. Solvency of firms position is considered by Gitman and Zutter related to
liquidity. It is essential that an organization is capable of paying its currently maturing
debts. Therefore, liquidity is a vital element for every day operations. (Gitman and
Zutter, 2010)
According to Subramanyam and Wild (2016), liquidity, in its simplest form, is the
ability to covert resources into cash. Financial stakeholders look on the ability of a firm
in converting assets into cash because having problems on liquidity can greatly affect
operational efficiency and profitability. So, lack of knowledge about liquidity and how
liquidity ratios operate is a big hindrance between the owner/s and the success of the
business.
As regard to Edna V. Baculo (EVB) Bookkeeping, it is a service type business
that offer services such as bookkeeping and accounting business to owners of small
businesses and helping them achieve their goals while mutually pursuing profitability. As

observed by researchers, there are less numbers of this type of business in Batangas
City. Due to its increasing customers, it is expected to have more strategies to win
patrons loyalty and must have a deeper understanding about financial activities
specifically about liquidity ratio to achieve cost-effectiveness.
Being Financial and Management Accounting (FMA) students, the researchers
wanted to acquire further knowledge about the effect of liquidity ratio to profitability of
Edna V. Baculo (EVB) Bookkeeping. This implies the importance of liquidity ratio since it
is used to gauge the organization's capacity to pay all present debts with all available
current resources. The strength and financial health, or lack thereof, of a company and
its efficiency in settling obligations as indicated by liquidity ratios is of great significance
to creditors, market analysts, and even potential investors. Be used as a benchmark for
the firm to what are the important and necessary actions the company needs to survive,
remain attractive, and sustain its operation for longer years, as they are a potent tool in
other businesses and individualities for providing accounting services.
OBJECTIVES OF THE STUDY
This study aimed to determine the effect of liquidity ratio to profitability of Edna V.
Baculo (EVB) Bookkeeping in Batangas City.
Specifically, it intends to know the profile of Edna V. Baculo (EVB) Bookkeeping
in Batangas City in terms of capitalization, years of existence, monthly income, and type
of business; to describe liquidity ratio of EVB in terms of working capital ratio, cash ratio,
and, receivables turnover ratio; to assess the firms liquidity; and, to measure the
companys profitability.

LITERATURE REVIEW
Any successful business owner is constantly evaluating the performance of his or
her company. Analyzing and studying liquidity ratio is significantly important on the
overall performance of the firm, including its profitability.
RELATED STUDY
Liquidity
According to Averkamp (2016), an association's ability on pay its bills starting
with cash or from assets that be changed under cash quickly is liquidity. Called as the
basic analysis proportion, or otherwise the quick ratio, is an indicator of an
organization's liquidity.
Resources can be further classified by level of liquidity every asset has. Liquidity
alludes to the capacity to change over the advantage into money - a few things might be
more liquid than others. Case in point, a stock can be sold inside minutes or days. Be
that as it may, property, for example, area or structures, can take weeks, months or
even years to change over into money. The straightforwardness with which money
related instruments, for example, stocks and securities, are changed over and
possession is exchanged is the reason they are regularly alluded to as liquid resources.
Notwithstanding, most resources can inevitably be traded for money, or sold. (Burke,
2016)
Liquidity alludes to the ease at which resources can be changed over into money.
An asset is said to be liquid, on the off chance that it is anything but difficult to purchase

and offer; for instance short-date government gilts are a very liquid business sector
since it is anything but difficult to offer on the security markets.
As resource is said to be illiquid on the off chance that it is hard to purchase and
offer. For instance, a house is an extremely illiquid resource in light of the fact that to
offer a house requires significant time and cost. When you have found a purchaser, the
cost of a house may have changed significantly particularly amid blast and busts.
The Significance of Liquidity
A financial specialist may require both liquid and illiquid resources. You require
liquid advantages for manage any sudden transient emergency. However, illiquid
resources may offer more prominent chance for capital increases and higher yield.
For instance, on the off chance that you place cash in a present record, you have
quick get to, yet loan costs have a tendency to be low. In the event that you place cash
in a period store account, you need to give the bank a 7 day or 30 day guidance ahead
of time you require the cash. This makes your reserve funds more illiquid, yet the bank
repays by paying a higher financing cost. (Pettinger, 2014)
Liquidity Ratio
Liquidity ratios assess the capacity of a business to pay and settle its debt
obligation. It demonstrates the ability on how they turn some assets into cash and its
levels. Liquidity is not just a measure of how much money the business has but how
simple to business earn or convert resources into money. It is easy for many businesses
to change some assets into cash including the accounts receivable, inventory and

exchanging

securities

that

will

be

in

companys

calculation

of

liquidity.

(http://www.myaccountingcourse)
Distributing cash and some assets through current obligations and short term
borrowings are the result of liquidity ratios. The company illustrates how many times
their assets can pays the short term debt obligations. If the result occurs higher than 1,
the short term obligations are totally secured.
The company who knows how to manage their money shows that their liquidity
ratios is higher than 1. And also it is less probable into financial challenges and
problems. Therefore, the more the liquidity ratios are, the greater the margin of safety
that the company have to meet its present obligations.
The current ratio, acid test ratio, cash ratio and working capital are common
illustrations of liquidity ratios. Those assets that are not the same are thought by many
analysts to be important. Because cash and cash equivalents are probably the best to
be used in financial obligations, several analysts consider it as significant assets.
Associated to cash and cash equivalents, the borrowers, trade receivables and the cost
of inventory are significant assets for the computation of liquidity ratios.
It is also important to know more about the idea of cash cycle. Cash is always in
the series of operations of a business. A business cash is frequently attached in the
trade borrowers, finished goods and raw materials. Liquidity ratios try to estimate the
stability among current assets and current liabilities and the cash which is attached in
the cash cycle is recognized as working capital.

The capability of an organization to allow cash from cash cycle must possess to
meet its budgetary problems when the lenders look for payment. In other words, an
organization should have the ability to convert its short term assets into cash.
(http://www.readyratios)
Before performing the inspection on a firm, investors first examine the liquidity
ratios. Then, those companies that is unfailingly suffering its short-term debt is at
greater threat of insolvency, liquidity ratios are the measurement if a company will
continue its transaction. (http://www.aaii.com)
A major factor in determining the liquidity of a business is the difference between
its assets and liabilities. This will tell how a business will pay its debts. It is helpful to
focus on current values in viewing assets and liabilities. (Sather, 2015)
Current Ratio/Working Capital Ratio
One way to measure the ability of a business to cover its current liabilities is
through the current ratio. It is also called working capital ratio, current assets divided by
current liabilities.
No business would want to sell its assets to cover all its liabilities. When a
business has a high current ratio it would have more residual assets after paying its
debts for it has still enough income.
Cash Ratio
Operating cash flow ratio or also known as cash ratio will show the available
cash a business has relative to its current liabilities.

Cash ratio is cash and cash equivalents divided by current liabilities. It has a limited
usefulness, but it can still be identified just in case the business needs it.
(http://einvestingforbeginners.com)
Accounts Receivable Turnover Ratio
Accounts receivable turnover ratio measures the number of times the business
can convert its accounts receivable into cash throughout a period. Each time a business
accumulates its average receivables is referred to as a turn.
The efficiency of a business depends on its accounts receivable turnover ratio by
collecting its credit sales from customers. Few businesses can collect their receivables
within 2 months while others may be up to 7 months to collect from customers.
(http://www.myaccountingcourse.com)
Profitability
Profitability is being measured by income and costs or expenses. Based from the
activities of an organization or business, income is the money produced or gained while
costs or expenses are the assets devoured or spent. As per Swanson (2012), running a
business is costly. Profitability is the most essential objective of every companies or
organizations. Without it, the business would not be able to make due as planned in the
long run. That is why measuring the past productivity, present status and preparing for
the future profitability is very essential. (Hofstrand, 2013)
One of four building obstructs for examining budgetary explanations and
organization execution overall is profitability. The other three are proficiency,

dissolvability, and business sector prospects. Speculators, loan bosses, and directors
utilize these key ideas to break down how well an organization is getting along and the
future potential it could have if operations were overseen appropriately.
The two key parts of profitability are incomes and costs. Incomes are the
business salaries. This is the measure of cash earned from clients by offering items or
giving administrations. Producing gain or income isn't free, be that as it may. All
businesses must utilize their assets keeping in mind the end goal to create these items
and give these administrations. Assets, similar to money, are utilized to pay for costs
like worker finance, rent, utilities, and different necessities in the generation procedure.
Productivity takes a glimpse about the income and cost relationship to perceive if a
business or organization is doing and performing well to measure and predict for the
future

possible

development

business

or

organization

may

attain.

(http://www.myaccountingcourse.com)
Also, profitability figures out if a business stays in business if it procures a profit.
Profit is what remains in the income of a company or business after paying all of the
expenses directly measured from the beginning of the business process and activities.
(Grimsley, 2014)
The Income Statement is customarily used in measuring the companys
profitability for the past period of accounting. It is basically the posting of business
income and expenses for a period of time. A budget may also be used if the company
needs to project profitability. (https://www.extension.iastate.edu)

Trade-Off between Liquidity and Profitability


Profit and liquidity are the most conspicuous issues that administration of every
association ought to consider concentrating on and contemplating them as their most
critical obligations. Liquidity suggests to the capacity of a firm to meet its fleeting
commitments. Liquidity assumes a major participation in determining the major position
of a business operation. An investigation of liquidity is of actual importance to both the
internal and external auditors on account of its suitable relationship with daily operations
of a business (Bhunia, 2010). A powerless liquidity position represents a risk to the
solvency and additionally productivity of a firm and makes it perilous and unsound.
Profitability is a measure of the amount by which an association's incomes
surpasses its important costs. Potential financial specialists are occupied with profits
and gratefulness in business sector cost of stock, so they give careful consideration on
the benefit proportions. Administrators then again are keen on measuring the working
execution as far as gainfulness. Thus, low overall revenue would propose insufficient
administration and financial specialists would be reluctant to put resources into the
organization.
The liquidity and profitability objectives are opposing to each other in many
choices which the finance supervisor takes. For instance, the firm by taking after an
indulgent credit approach might be in a position to build its deals, however its liquidity
may tend to more awful. Notwithstanding this, alluding to the danger return hypothesis
there is an immediate relationship amongst danger and return.

Consequently, firms with high liquidity may have generally safe and after that low
benefit. Alternately, firm that has low liquidity may confront high hazard results to higher
return. Subsequently, a firm is required to keep up a harmony amongst liquidity and
gainfulness in its everyday operations. (Patel, 2013)
Firms with less current assets will be having an issue in proceeding with their
operations while if the current assets are at an excess, it demonstrates the return on
investment is not in flawless condition. Since ideal cash levels are influenced by the
variables outside the preventive concept of treasury, the organization must think
expansive and take genuine operational choices on how to the profit opportunities that
is accessible in cash flows process.
By using the ratio analysis, we can determine how liquid a company is to
discover a ratio of current assets for current liabilities is by computing for a current ratio.
Quick ratio will allow whether can dispense their current debt, prohibit to offer any stock.
It's imperative for an organization to concern on this because, in the event that they
have to offer stock, they require a client to buy that stock. Experts use liquidity ratios to
make judgments around a firm, but there are impediments to these ratios. The liquidity
of an association's receivables and inventories can misdirect if the company's sales are
regular as well as the firm uses a natural business year.
Cash flows ratios choose the measure of cash created over a time allotment and
balance that with Short term commitments. This gives a clearer picture if the firm has a
liquidity issue with respect to its short term commitment paying limit. Operating cash
flow is registered by separating income from operations by current liabilities. This shows

the association's ability to make the assets anticipated to meet current liabilities. Firms
with lesser current assets will be having an issue in continuing with operations while if
the current assets are excessive, it shows return on investment of the company is not
good.
This idea has a connection with monetary hypothesis since exchange and
provision is a fundamental reason in overseeing cash. Furthermore, this reason
additionally has an assumption which all the idea of treasury administration is in the
practical insight of their terms. Cash conversion cycle demonstrates the relation
amongst liquidity and productivity. It is more imperative to measured profitability
contrasted with if the organization is utilizing current ratio the higher the ratio, the
higher the comfort level. The greater part of the cash flow ratio are not uniform but
rather change by industry qualities.
The required liquidity for every business relies on upon the balance sheet
circumstance of the business. With a specific end goal to assess the liquidity state,
special significance is held by the path in which there are grouped hierarchical assets
and liabilities. Liquidity risk is seen as a major danger. Liquidity lines and sponsoring
offices may moreover have a section inside an association's liquidity program by helping
an establishment secure itself against current risks that may happen when regarding
cash outflow obligations. Associations by and large don't consider improving liquidity
management before accomplishing emergency conditions. (Saleem and Rehman, 2016)
The administration of working capital is one of the most noticeable parts of
money related organization. Net working capital is the amount by which a company's

current assets surpass its current liabilities. On the off chance that the organization falls
to keep a satisfactory level of working capital, it will probably become insolvent. The
current assets of an organization must be at a level that can cover the liabilities at
sensible margin of safety.
A high liquidity is thought to be an indication of monetary quality; notwithstanding,
a high liquidity can be as undesirable as low. This would be an aftereffect of the way
that current assets are for the most part the less beneficial than the long term assets. It
suggests that the cash invested into current resource produces lesser returns than long
term assets, implying along these lines an open door cost. Other than that, the sums
used in current asset make extra costs for support, lessening along these lines the
efficiency of the firm.
Holding money additionally gets a positive outcome, for instance, it gives the
immediate payment to daily costs, it gives a margin of safety for conceivable downturns
and the responsibility of holding cash guarantees the significantly productive
speculations that requests immediate payment.
The higher the value of assets put into current resources, the lower the risk of
equity procedure and the lesser profitability. In terms of higher budgetary slack, the
profits are lesser but with less liquid equity composition. A small amount of net equity
can enhance higher rates of return because the amount of funds connected with assets
of lesser productivity is being restricted.
Uniformity among budgetary and monetary backgrounds both need to be
accomplished. Each business is most worried with its profitability. Profitability is the

capacity to make profit from all the business exercises of an endeavor. It indicates how
productively the administration can make profit by utilizing every one of the assets
accessible as a part of the business sector. A standout amongst the most as often as
possible utilized instruments of measuring benefit is productivity proportions.
On the off chance that there will be an outlandish over interest in current
resources then this would contrarily influence the rate of profit for resources (Vishnani
and Shah, 2007). Directors of nonfinancial organizations must guarantee greatest come
back from the ventures of their chief and along these lines must ensure they invest
resources in high yielding ventures other than holding excess investments in current
assets. (Njure, 2014)
Productivity objective was nearly drawn if greater stocks were secured when
calculating the crude objects incremental costs. Likewise, a company that is taking after
free loan arrangement might experience to enhance the deals. Greater return has a
proportional relation with lesser risk. (http://www.worldwidejournals.com)
Profitability and liquidity are the two terms which are most generally viewed by
both the financial specialists and proprietors with a specific end goal to gauge whether
the business is doing great or not. Given below are the differences between liquidity and
profitability:
Profitability connotes profits which the organization has made during the year
which is ascertained as distinction amongst income and cost done by the organization,
while, liquidity connotes accessibility of cash with the organization anytime.
A profitable organization might not have enough liquidity in light of the fact that a

large portion of the assets of the organization are put into ventures and an organization
which has parcel of cash or liquidity may not be productive on account of absence of
chances for putting inactive cash.
Gross profit, net profit, working profit, return on capital utilized are a portion of the
ratios which are utilized to figure productivity of the firm while current ratio, liquid ratio
and debt obligation scope are a portion which are utilized to ascertain liquidity of the
firm.
An organization which is profitable can go bankrupt in the short term on the off
chance that it doesnt have liquidity though an organization which has liquidity yet is not
productive can't go bankrupt in the short term. Henceforth, from the above that
profitability and liquidity are not same and the organization needs to keep up a fine
harmony balance that if organization concentrates on an excessive amount of
profitability then it risks or not ready to pay its lenders, representatives and different
parties while then again if organization concentrates on liquidity and afterward it risks
going into loss. (Parikh, 2014)
EVB Bookkeeping Services
According to EVBs profile, EVB Bookkeeping Services is an establishment which
primary and most important goal is to give the best quality service to its clients and
customers and heading to be the number one bookkeeping company in CALABARZON.
With its aim to be a reliable, creditable and focused company, EVB believes that the
most important factor that affects business operations is the clients; customers
satisfaction has been and will always be the priority.

Aside from meeting the personal needs and demands of and for the convenience
of the clients, EVB's intention to be felt by the market; service guaranteed and on time
accomplishment is her best positive feature.
EVB employed are formed with committed individuals who essentially valued the
following characteristics:
Discipline - formation of a community wherein individuals are self-disciplined and
practice self-control towards being a proactive member of a society.
Integrity - formation of a community wherein individuals are not duplicitous but are
united in their words and actions.
Innovation - formation of a community of persons that is responsive to the needs of the
society.
Excellence - formation of individuals who do ordinary things extraordinary well and are
able to bring out the best even in the most ordinary things that they do.
EVB Bookkeeping Services primary purpose is to deliver and provide on time
accurate and meaningful financial information both in appearance and most especially
in content. Their mission is to be committed to every client equally. They are highly
devoted to providing all of their clients with superb quality, accurate, and prompt
bookkeeping, accounting, training, and other business-related services. They are
dedicated to enabling small and medium-sized business to maximize their success and
profit, and, contribute to the community's economic growth, and cultivate into valued
corporate citizens.

Method
Research Design
The descriptive method was used in order to obtain accurate data, come up with
adequate interpretation, and in order to collect the necessary facts and information the
researchers needed.
According to Robert B. Bush (2006), descriptive research designs are viewed as
survey research methods for collecting quantitative data from group of people through
question and answer process.
Respondents of the Study
The respondents of this research are the managers and accounting staffs of
Edna V. Baculo (EVB) Bookkeeping in Batangas City. The researchers personally
visited the company to ask the permission of the persons involved to answer
questionnaires prepared by the researchers. Doing so resulted in obtaining necessary
information needed in the study.
Data Gathering Instrument
To obtain relevant data from the respondents, a self-made questionnaire and
other data that have great significance was used. The researchers prepared
questionnaires based on the information gathered from different books of Financial
Management and through internet that signifies the same topic.
The questions were constructed in English since the respondents are
knowledgeable with the topic. Researchers assure that the questions made are

significant. The first part of questionnaires includes the identification of the company
profile. Second part is the determination on how the firm manages its assets. Last part
is the assessment of companys profitability.
Data Gathering Procedures
A draft research title was made and submitted to the adviser and later on to the
dean for approval. Upon approval, the researchers started gathering data through
browsing, scanning and reading textbooks from the library, journals, articles, online
references, related studies, and other materials associated with the study. College of
Business Administration Department professors helped in the validation of its internal
and external content.
A letter was prepared by the researchers addressed to Edna V. Baculo (EVB)
Bookkeeping in Batangas City for the permission to conduct research and was
submitted together with the structured questionnaires for further approval and validation
of the instrument. The participants were oriented about the purpose of the study and
were given the assurance that the information gathered would be kept confidential
before answering the questions. The questionnaires were personally collected after
giving the respondents sufficient time in answering.
The results were tallied and submitted to the authorized statistician. Researchers
ranked, analyzed and interpreted the information given by the statistician. Later the
findings and recommendations of the study were articulated.
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