Chapter 15 Flashcards
Working captial
total current assets - total current liabilities
liquidity/solvency
*excess assets, ability to pay current liabilities
Current Ratio
Current Ratio / Current Liabilities
high better
liquidity/solvency
*ability to pay current liabilities aka bankers ratio
Quick Ratio
Quick assets / current liabilities
high is better
liquidity/solvency
*measures “instant” debt paying ability of a co, aka acid test ratio
Quick assets consist of…
-cash, checks, money orders, deposits
-CS, PS investments
-goods or services received but not yet paid for by a customer
*quick assets are cash and other assets that easily turn into cash (cash, tempt investments, AR, marketable securities)
not inventory because you have to sell it so its slow
Accounts Receivable Turnover
Net sales / average AR
high better
liquidity/solvency
* reltaion between how much you sell and how much you sell on credit, # tells how many times you collect
net sales
sales - sales,returns,allowances - sales discount
average AR
(begin AR + end AR) /2
Number of Day’s Sales in Receivables
average AR / Average daily sales
low better
liquidity/solvency
*how many days the AR have been outstanding
average daily sales
net sales/ 365
Inventory Turnover
cost of goods sold / average inventory
high better
liquidity/solvency
*how quickly you sell inventory, how efficient management of inventory is
average inventory
(beg inventory + end inventory) / 2
number of day’s sales in Inventory
average inventory / average daily cost of goods sold
low better
liquidity/solvency
*how long it takes to buy, sell and replace inventory
average daily cost of goods sold
cogs / 365
earning per share (eps on common stock)
(net income- preferred stock) / shares of CS outstanding
high better
profitability
*measures share of profits that are earned by a share of CS
*potential investors look at this # “current value”
Price Earnings Ratio
market price per share of CS / earnings per share on CS
high better
profitability
*measures future earnings prospects “future value”
