Activity Ratios Flashcards
What do activity ratios measure?
A firm’s ability to convert different accounts within its balance sheets into cash or sales.
What is Accounts Receivable Turnover?
A firm’s ability to collect money from its customers.
Do you want Accounts Receivable Turnover to be high or low?
High
The higher it is, the more efficient a company is at collecting money.
What is the Average Collection Period?
The amount of time it takes for a business to receive payments owed in terms of accounts receivable.
Do you want the Average Collection Period to be high or low?
Low
The lower the collection period, the faster a company is at collecting payments.
What is Inventory Turnover?
How many times a company has sold and replaced inventory during a given period.
Do you want Inventory Turnover to be high or low?
High
High ratio implies strong sales
What is Days to Sell Inventory?
The number of days to sell through a fim’s inventory.
Do you want Days to Sell Inventory to be high or low?
Low
The smaller the number, the more frequently the company is selling its inventory.
What is Accounts Payable Turnover?
Used to calculate the rate at which a company pays of its suppliers.
What do credit purchases equal?
The total purchases from suppliers.
Do you want Accounts Payable Turnover to be high or low?
High
The higher it is, the faster a company is at paying off its suppliers.
What is Accounts Payable Payment Period?
The average time (in days) that a company takes to pay its bills to its suppliers.
Do you want the Accounts Payable Payment Period to be high or low?
Low
The lower it is, the faster it is to pay off suppliers.
