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Accounting liquidity measures the ease with which an

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Accounting liquidity measures the ease with which an individual or company can meet their financialobligations with the liquid assets available to them.
Liquidity is the amount of money that is readily available for investment and spending. It consists ofcash, Treasury bills, notes and bonds, and any other asset that can be sold quickly. High liquidityoccurs when there are a lot of these assets. Low or tight liquidity is when cash is tied up in non-liquidassets. It also occurs when interest rates are high, since that makes it expensive to take out loans.LIQUIDITY RATIOS:Businesses use liquidity ratios to measure their financial health. The most important are:1.Current Ratio: The company's current assets is divided by its current liabilities. It determineswhether a company could pay off all its short-term debt with the money it got from selling itsassets. Current ratio can be calculated by using the formula,Current Ratio = Current Asset /Current Liability2.Quick Ratio: The same as the current ratio, only using cash, accounts receivable andstocks/bonds. The company can't include any inventory or prepaid expenses that can't bequickly sold. Quick ratio can be calculated by using the formula,Quick Ratio = Current Assets- Inventory- Pre Paid Expenses/ Current LiabilityPROFITABILITY:Profitability is the ability of a business to earn a profit. A profit is what is left of the revenue abusiness generates after it pays all expenses directly related to the generation of the revenue, such asproducing a product, and other expenses related to the conduct of the business activities.There are many different ways for you to analyze profitability. Profitability ratios, which are ameasure of the business' ability to generate revenue compared to the amount of expenses it incurs.Let's look at a few of the primary analytical approaches.1.Net Profit Ratio: Measures the profitability ofbusiness. Net profit ratio is calculated usingthe formula,Net profit margin = (net income / net sales) * 1002.Gross Profit Ratio:Measures the cost of production. Gross profit ratio is calculated using theformula,Gross profit margin = (gross profit / net sales) * 100.
3.Operating Ratio:Allows us to know how much costs unrelated to producing the product forsale are cutting into your profits. Costs unrelated to production can include such things asgeneral business, staff and administrative expenses of the business. Net operating margin isoften referred to as your earnings before interest and taxes or EBIT. Operating profit ratio iscalculated using the formula,Operating margin = (operating profit / net sales) * 100TURNOVER:The turnover ratio is the percentage of a mutual fund or other investment's holdings that have beenreplaced in a given year, which varies by the type of mutual fund, its investment objective and/or theportfolio manager's investing style.

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Term
Fall
Professor
NA
Tags
Balance Sheet, Financial Ratio

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