Section 26 - Financial Statement Analysis Flashcards
What are the 2 ratios used to determine the ability of the company to cover its upcoming bills?
1) Current ratio
2) Quick (acid test) ratio
How do you calculate Current Ratio?
Current assets / Current liabilities
-measure short-term debt paying ability
How do you calculate Quick or Acid-test Ratio?
Quick assets / Current liabilities
- Quick asset is cash, marketable securities and receivables
- measure immediate short-term liquidity
What are the two ratios used to determine the efficient use of inventory?
1) Inventory Turnover Ratio
2) Number of days’ sales in average inventory
How do you calculate Inventory Turnover Ratio?
Cost of sales / Average of beginning and ending inventory
- measure the number of times the average inventory is sold
- may need the following formulas to compute ratio
- Cost of sales = BI + Purchases - EI
- Average Inventory = (BI + EI)/2
How do you calculate Number of days’ sales in average inventory?
Average ending inventory / Average daily cost of goods sold
OR
360 / Inventory Turnover
-measures number of days required to sell inventory
What are the two ratios used to determine the efficiency of receivables?
1) Receivable turnover ratio
2) Number of days’ sales in average receivable
How do you calculate Receivable turnover ratio?
Sales on credit / Average of beginning and ending A/R
-measures liquidity of receivables
How do you calculate Number of days’ sales in average receivable?
360 / Receivable Turnover
-measures number of days required to collect receivables