Section 26 - Financial Statement Analysis Flashcards

1
Q

What are the 2 ratios used to determine the ability of the company to cover its upcoming bills?

A

1) Current ratio

2) Quick (acid test) ratio

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2
Q

How do you calculate Current Ratio?

A

Current assets / Current liabilities

-measure short-term debt paying ability

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3
Q

How do you calculate Quick or Acid-test Ratio?

A

Quick assets / Current liabilities

  • Quick asset is cash, marketable securities and receivables
  • measure immediate short-term liquidity
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4
Q

What are the two ratios used to determine the efficient use of inventory?

A

1) Inventory Turnover Ratio

2) Number of days’ sales in average inventory

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5
Q

How do you calculate Inventory Turnover Ratio?

A

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
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6
Q

How do you calculate Number of days’ sales in average inventory?

A

Average ending inventory / Average daily cost of goods sold

OR

360 / Inventory Turnover

-measures number of days required to sell inventory

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7
Q

What are the two ratios used to determine the efficiency of receivables?

A

1) Receivable turnover ratio

2) Number of days’ sales in average receivable

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8
Q

How do you calculate Receivable turnover ratio?

A

Sales on credit / Average of beginning and ending A/R

-measures liquidity of receivables

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9
Q

How do you calculate Number of days’ sales in average receivable?

A

360 / Receivable Turnover

-measures number of days required to collect receivables

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