CH 5, 6, 7, 9 EQUATIONS

CH 5, 6, 7, 9 EQUATIONS - Liquidity Ratio: Current ratio =...

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Liquidity Ratio: Current ratio  = total current assets / total current liabilities  *Higher the current ratio, the more liquid the firm is considered to be. A ratio of 2.0 is  occasionally cited as acceptable, but a values acceptability depends on the industry in  which the firm operates.  Quick ratio  = (Total Current Assets – Inventory) / total current liabilities *1.0 or greater is occasionally recommended, but as with the current ratio, what values is  acceptable depends largely on the industry. The quick ratio provides a better measure of  overall liquidity only when a firms inventory cannot be easily converted into cash.  Activity Ratio: Inventory Turnover  = Cost of Goods Sold / Inventory *Meaningful only when compared with another firms in the same industry or to the firms  past inventory turnover. High turnovers the better since you have a higher turnover rate.  Average Age of Inventory  = 365 / Inventory Turnover *Inventory turnover converted into an average age of inventory per day by dividing it by  365 Average Collection Period  = Accounts Receivable / Average Sales per day 
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This note was uploaded on 11/24/2010 for the course ACCOUNTING FINANCE taught by Professor Ozyge during the Spring '10 term at Rowan.

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CH 5, 6, 7, 9 EQUATIONS - Liquidity Ratio: Current ratio =...

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