16-1 - Chapter 6 I. The current asset classification a....

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Chapter 6 I. The current asset classification a. Definitions i. Current asset 1. Something that is expected to be converted into cash within a year ii. Operating cycle 1. The time it takes to go from cash → inventory → sell inventory → collect cash b. The relative size of current assets across industries i. Differs significantly- based on business and industry ii. Primary assets c. Measures using Current Assets: Working Capital, Current Ratio, & Quick Ratio i. Current assets are a measure of short-run cash outflows, ii. Comparisons 1. Working capital a. Current assets-current liabilities 2. Current ratio a. Current assets/ Current liabilities 3. Quick ratio a. (Sum of cash + short term investments + short term rec.)/current liabilities d. The economic consequences of working capital, current ratio, quick ratio i. They are used to assess a companies ability to meet responsibilities ii. Banks use these ratios to decide how much to lend
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iii. Used by auditors to raise flags of possibly management fraud
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16-1 - Chapter 6 I. The current asset classification a....

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