Key Ratios


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KEY FINANCIAL STATEMENT RATIOS Liquidity ratios Example: A "2.0 to 1" ratio means that there is If current liabilities are rising faster Current Ratio Current Assets 2.0 to 1 $2.00 of current assets for every $1 than the current assets from which Current Liabilities in current liabilities, which suggests they must be paid, company could that short-term creditors can be become insolvent (unable to pay reasonably sure of being paid. its debts) and eventually bankrupt. Quick Ratio Quick Assets * 0.9 to 1 Indicates extent to which claims of If Current Ratio is OK, but Quick Ratio "Acid Test" Current Liabilities short-term creditors are covered by is low or declining, the cause may "quick" assets*. * Quick assets include Cash, Marketable Securities, and Accounts Receivable (excludes Inventory) Asset Management Ratios Number of times merchandise Low or declining turnover suggests Inventory Cost of Goods Sold* 4.0 times items are sold and restocked excessive inventory, or possibly Turnover Inventory ("turned over") per year. obsolete or otherwise overstated inventory. * Some publications use "Sales" as the numerator, and /or average inventory as denominator Number of days Accts receivable * 45 days Number of days customers are taking If the number of days is increasing, to Collect Avg. daily sales to pay. If substantially more than credit credit and collection policies may [Sales/365 days] terms, then credit checking and/or need to be strengthened.
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This note was uploaded on 03/28/2011 for the course ACC 501 taught by Professor Patriciam.casey during the Spring '07 term at National.

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