Podcast Beta
Questions and Answers
What does the Cash Conversion Cycle measure?
Which metric is used to show the frequency of inventory turnover in a year?
What does the Operating Cycle represent in financial analysis?
How is Average Age of Accounts Receivables calculated?
Signup and view all the answers
What does the Inventory Turnover metric measure?
Signup and view all the answers
In financial ratios, what does the Accounts Payable Turnover indicate?
Signup and view all the answers
What do liquidity ratios in ratio analysis primarily assess?
Signup and view all the answers
Which financial ratio measures the company's ability to pay its current liabilities?
Signup and view all the answers
What is the primary test of solvency according to the text?
Signup and view all the answers
Which assets are included in the 'quick assets' used in the Quick Ratio calculation?
Signup and view all the answers
What do profitability ratios in ratio analysis primarily indicate?
Signup and view all the answers
Which financial ratios are concerned with the company’s long-run survival?
Signup and view all the answers
Study Notes
Financial Ratios
- Ratio analysis is a method to gain insight into a company's liquidity, operational efficiency, and profitability by studying financial statements.
Liquidity Ratios
- Relate to a company's short-term survival
- Measure a company's ability to use current assets to repay liabilities as they become due
- Measure a company's short-term liability to pay its obligations and meet unexpected cash needs
Solvency Ratios
- Relate to a company's long-run survival
- Measure a company's ability to repay lenders when debt matures and make required interest payments prior to maturity
Profitability Ratios
- Relate to a company's performance in the current period
- Measure a company's ability to generate income
Liquidity Ratios Formulas
- Current Ratio: Current Assets / Current Liabilities
- Measures a company's ability to pay its current liabilities
- Quick Ratio (Acid-Test Ratio): Quick Assets / Current Liabilities
- Measures a company's short-term liquidity
- Working Capital Ratio: Current Assets - Current Liabilities
- Measures a company's working capital and ability to meet current obligations
Efficiency Ratios
- Accounts Receivable Turnover: Net Credit Sales / Average Accounts Receivable
- Measures the number of times accounts receivable are collected and replaced
- Inventory Turnover: Cost of Goods Sold / Average Inventory
- Measures the number of times inventory is replaced during the period
- Accounts Payable Turnover: Net Credit Purchases / Average Accounts Payable
- Measures the number of times accounts payable are paid and replaced
Other Financial Ratios
- Average Age of Receivables or Days' Sales Outstanding: Number of Days in a Year / Receivable Turnover
- Measures the time required to complete one collection cycle
- Average Age of Inventory or Days in Inventory: Number of Days in a Year / Inventory Turnover
- Measures the time inventory is held before sale
- Average Age of Accounts Payables or Days in Accounts Payable: Number of Days in a Year / Accounts Payable Turnover
- Measures the time taken to pay accounts payable
- Operating Cycle: Average Age in Accounts Receivable + Average Age in Inventory
- Measures the time required to sell inventory and collect receivables
- Cash Conversion Cycle: Average Age in Accounts Receivable + Average Age in Inventory - Average Age in Accounts Payable
- Measures the length of time between the purchase of inventory and the collection of cash from customers
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Test your knowledge of financial ratios and ratio computations used to analyze a company's liquidity, efficiency, and profitability based on its financial statements. This quiz covers liquidity ratios that assess the company's short-term survival and ability to repay current liabilities.
