Chapter 19 - Evaluating Liquidity (1)

Question 1

How is Working Capital Ratio (WCR) calculated

Answer 1

Current Asset/Current Liabilities =
Number of times :1

Question 2

What does WCR measure

Answer 2

It measures how many dollars of current assets are available to meet each dollar of current liability

Question 3

What should a business do if their WCR is below 1:1

Answer 3

• Make a capital (cash) contribution
• Seek additional finance by entering into, or extending, overdraft facilities
• take out a loan to purchase NCA

Question 4

How is Quick Asset Ratio Calculated

Answer 4

CA less Prepaid Expense and Inventory/ Current Liabilities =
Number of times : 1

Question 5

What can be done if inventory turnover is to slow

Answer 5

• Increase sales, by advertising, changing selling prices or change inventory mix
• decrease the level of inventory on hand by ordering less, or ordering smaller amounts more frequently

Question 6

Describe the relationship between APTO, ARTO and ITO

Answer 6

In most cases, a business will want its ITO and ARTO to be fast whereas it will want its APTO to be as slow as possible (without exceeding credit terms). Selling inventory for cash and buying inventory on credit provides time for the business to sell its inventory and collect the cash before it has to repay its Accounts Payable