Activity Ratios Flashcards
Turnover ratios generally use average balances for balance sheet components. However some CPA exam questions instruct testers to use year-end balances instead.
A/R Turnover
Net Credit Sales / Avg. Net Receivables
Indicates the receivables’ quality and the success of the firm in collecting outstanding receivables. Faster t/o gives credibility to the current and acid-test ratios.
A/R Turnover in Days
(365 Days) / (A/R Turnover)
Indicates the avg. # of days required to collect A/R
Inventory Ratio
COGS / Avg. Inventory
Measure of how quickly inventory is sold. Higher = better.
Inventory Turnover in Days
(365 Days) / (Inventory Turnover)
Indicates avg. # of days required to sell inventory.
Operating Cycle
A/R Turnover in Days + Inventory T/O in Days
Indicates # of days btw acquisition of inventory and realization of cash from selling the inventory.
Working Capital Turnover
Sales / Avg. Working Capital
Indicates how effectively working capital is used.
Total Asset Turnover
Net Sales / Avg. Total Assets
Indicates how gross income makes effective use of its assets. Higher = more effective.
Accounts Payable Turnover
(COGS) / (Avg. A/P)
Indicates # of times trade payables turn over during the year. Low t/o may indicates a delay in payment, such as a shortage of cash. It’s the rate at which a company pays off its suppliers.
Days in A/P
(365) / (A/P Turnover)
