FInancial accounting cours 10 Flashcards
What is the use of management ratios?
They are ratios that provide a better understanding of a company’s business or Cash Conversion cycle.
What is the Cash Conversion cycle?
- The period between purchasing raw materials (or goods) and collecting sales revenue.
- It is the time required to complete the cycle that depends on the nature of the business.
What is the beginning of the management cycle?
Purchase of raw material (or goods) from the supplier.
Describe the management cycle after the first step.
Payment of the supplier –> Sale of goods to the customer –> Receipt of sums due by the customers
Describe the Days Accounts Payables Outstanding.
It represents the average number of days between the time the company purchases its inventory and the time it pays the suppliers.
What is the formula for the Days Accounts Payables Outstanding?
(Accounts Payable/Purchases)*365 days (number of days)
How do you calculate the purchases?
- They must be calculated based on inventory (beginning and closing) and the Cost of Sales.
- Purchases = Cost of Sales + Closing Inventory - Beginning inventory
Describe the Accounts Payable Turnover.
This ratio shows the frequency of payments for purchases during the fiscal year.
What is the formula for Accounts Payable Turnover?
Purchases/Accounts Payable (number of times)
Describe the Days Inventory Outstanding.
It represents the number of days between the purchase and sale of inventory (or goods).
What is the formula for Days Inventory Outstanding?
(Inventory/Cost of sales)*365 days (number of days)
What is the comparability with the Days Inventory Outstanding?
You need to keep the Days Inventory Outstanding close to the industry standard.
Describe Inventory Turnover.
This is the frequency of inventory turnover during the fiscal year.
What is the formula for Inventory Turnover?
Cost of sales/Inventory (number of times)
Give examples of low inventory turnover.
- Risk of obsolescence.
- High storage costs.
Give examples of high inventory turnover.
The problem of too many goods being “out of stock”
Describe Days Sales Outstanding.
It represents the number of days between the sale of inventory (or goods) and the receipt of money due from the customer.
What is the formula for the Days Sales Outstanding?
(Accounts receivable/Revenues)*365 days (number of days)
Describe the account receivables Turnover.
This ratio calculates the frequency of sales collection during a fiscal year.
What is the formula for Receivables Turnover?
Revenues/Accounts Receivable (number of times)
How do you calculate the inventory conversion cycle?
Days Inventory Outstanding + Days Sales Outstanding
What does the inventory conversion cycle represent?
It represents the delay between the receipt (or end of production) of inventory and its transformation into cash.
How do you calculate the Cash Conversion Cycle?
Time to sell inventory + customer collection time - Days Payable Outstanding
Describe Asset Turnover. ($)
This ratio indicates what each dollar invested in the Assets generates in dollars of Sales.
What is the formula for Asset Turnover?
Revenues/Total Assets
Describe the interpretation of Asset Turnover.
- Relationship between sales volume and company size.
- The higher the ratio, the more the company uses all its resources.
- If interpreted in combination with the Net Profit Margin ratio, the Asset Turnover ratio gives an idea of the strategy (margin or volume).
What happens if there is a high asset turnover ratio and a low Net Margin?
It’s a volume-oriented strategy.
What happens if there is a low asset turnover ratio and a high Net Margin?
It’s a margin-oriented strategy.
Describe the liquidity ratios.
- These ratios make it possible to assess the company’s ability to meet its current obligations, which appear in the Current Liabilities.
- There’s a link between these ratios and the quality of management.
- The higher the ratios, the better the company’s solvency situation.
What is another name for liquidity ratios?
Solvency
What is the order of the 3 liquidity ratios?
Acid Test < Quick ratio < Current ratio
How do you calculate the Current ratio?
Current asset/Current liability
How do you calculate the Quick ratio?
(Cash + Current investments + Accounts Receivable)/Current liability
How do you calculate the Acid Test?
(Cash and cash equivalents + Current Investments)/Current liability
What is the other name for the Acid Test?
The Cash ratio
What happens if the Current ratio is inferior to 1?
Working Capital Liquidity is negative.
What happens if the Current ratio is superior to 1?
Working Capital Liquidity is positive.
