Liquidity Ratios

Question 1

Current Ratio

Answer 1

Current Assets/Current LiabilitiesMeasures ability to pay for short term debt; general rule of thumb is that it should be over 2.0

Question 2

Acid Test Ratio

Answer 2

Cash + Short-term Investments + Receivables (net)/Current LiabilitiesMeasures ability to pay immediately for short-term debt; general rule of thumb is that it should be over 1.0.

Question 3

Receivables Turnover

Answer 3

Net credit sales / Average Net ReceivablesMeasures how quickly a company collects their receivables

Question 4

Age of Receivables

Answer 4

Current Accounts Receivable/Average Daily SalesMeasures how many days it takes to convert sales into cash

Question 5

Inventory Turnover

Answer 5

Cost of Goods Sold/Average InventoryMeasures liquidity of inventory

Question 6

Inventory Holding Period

Answer 6

Current Inventory Balance/Average Daily CogsMeasures how many days it takes to convert inventory to sales