Chapter 4 - Ratio Analysis Flashcards
Accounts Receivable turnover
Credit sales (or revenue) / average Accounts Receivable
Inventory turnover ratio
Cost of sales / Average inventory
Inventory holding period
operating days / inventory turnover ratio
Fixed asset turnover
revenue / average fixed assets
working capital turnover
revenue / average working capital
What does AR turnover tell you?
The average number of times the company is paid
What does inventory turnover ratio tell you?
How many times the inventory has to be restocked. If ratio is 10, you have to restock 10 times per year
What does fixed asset turnover tell you?
the revenue generated by every $1 of fixed assets
What does working capital turnover tell you?
High W.C.: ineffective use of funds; low W.C.: liquidity problem if sales decline
Current ratio
current assets/current liabilities
Quick ratio
Quick assets/current liabilities
what are quick assets?
the sum of the assets BEFORE inventory
What is ratio analysis?
Comparing the ratios against benchmarks
How do you define a ratio?
The comparison and relationship of two figures
Explain the four basis of comparison
Industry average: easy access, quick idea, less valuable if it covers a large geographical area
Competitors: similar, difficult to obtain/explain difference
Past performance: except in a rapidly changing environment
Predetermined standards: consider external and internal factors
