Podcast
Questions and Answers
What does the Cash Conversion Cycle measure?
What does the Cash Conversion Cycle measure?
Which metric is used to show the frequency of inventory turnover in a year?
Which metric is used to show the frequency of inventory turnover in a year?
What does the Operating Cycle represent in financial analysis?
What does the Operating Cycle represent in financial analysis?
How is Average Age of Accounts Receivables calculated?
How is Average Age of Accounts Receivables calculated?
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What does the Inventory Turnover metric measure?
What does the Inventory Turnover metric measure?
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In financial ratios, what does the Accounts Payable Turnover indicate?
In financial ratios, what does the Accounts Payable Turnover indicate?
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What do liquidity ratios in ratio analysis primarily assess?
What do liquidity ratios in ratio analysis primarily assess?
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Which financial ratio measures the company's ability to pay its current liabilities?
Which financial ratio measures the company's ability to pay its current liabilities?
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What is the primary test of solvency according to the text?
What is the primary test of solvency according to the text?
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Which assets are included in the 'quick assets' used in the Quick Ratio calculation?
Which assets are included in the 'quick assets' used in the Quick Ratio calculation?
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What do profitability ratios in ratio analysis primarily indicate?
What do profitability ratios in ratio analysis primarily indicate?
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Which financial ratios are concerned with the company’s long-run survival?
Which financial ratios are concerned with the company’s long-run survival?
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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
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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.
