Current ratio Current assets Current liabilities 2004 2003 26400 13160

Current ratio current assets current liabilities 2004

This preview shows page 27 - 30 out of 304 pages.

Current ratio = Current assets / Current liabilities 2004 2003 26400 /13,160 15600/6400 = 2: 1 = 2.4: 1 Observation The enterprise appears to nave a strong liquidity position. There has been, however, a slight drop from year 2003 to year 2004. For every shilling that is owed in 2004, the firm has Sh.2 to pay the debt and for every shilling owed in 2003 , the firm has Sh.2.40 available to meet the liability. If the firm’s current ratio is divided into 1.0 and the resulting value is subtracted from 1.0, the difference when multiplied by 100 represents the
Image of page 27
FINANCIAL MANAGEMENT 28 percent by which the firm’s current assets can shrink without making it impossible for the firm to cover its current liabilities. A current ratio of 2 means that the firm can still cover its current liabilities even if its current assets shrink by 50 percent ([1.0 – (1.0/2.0)]× 100). b) Quick/acid test ratio = current assets- stock Current liabilities It is a more refined ratio than the current ratio in which the stocks are excluded as they may not be easily converted to cash. the ratio indicates the firms ability to pay the current liabilities from the more liquid assets of the firm. c) Cash ratio = cash + short term marketable securities Current liabilities This is a refinement of the quick ratio indicating the ability of the firm to meet its current liabilities from its most liquid resources. Short term marketable securities include commercial paper and treasury bills and other short term investments. 2. Turnover ratios They are also known as efficiency or activity ratios . They indicate the efficiency with which the firm has utilized the assets or resources to generate sales revenue/turnover. Activity ratios can be categorized into two groups: The first group measures the activity of the most important current accounts, which include inventory, accounts receivable, and accounts payable 1 . The second group measures the efficiency of utilization of total assets and fixed assets. a) Stock/inventory turnover = cost of sales Average stock It indicates the number of times the stock was turned into sales in the year. The higher the ratio, the better the firm and the higher the sales. A low stock turnover ratio indicates that the stock levels are either very high or they are slow moving this leads to a reduction in the firms profitability. Note: the average stock is the average of the opening and closing stock. 1
Image of page 28
FINANCIAL MANAGEMENT 29 b) Stock holding period = 360 Days x average stock Cost of sales Indicates the number of days the stock was held in the warehouse before being sold. c) Debtors turnover = Annual credit sales Average debtor This ratio indicates the number of times debtors come to buy on credit after paying their dues to the firm. If the rate is high the better the firm as it means they bought many times hence meaning they paid within a shorter time. The average debtor is the average of the opening and closing debtor balances. If no opening debtors are given use the closing debtors to represent average debtors.
Image of page 29
Image of page 30

You've reached the end of your free preview.

Want to read all 304 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes