Objective 5 Calculate the acid-test ratio and days’ sales in receivables

(Cash + Short-term investments + Net current receivables) ÷ Total current liabilities Acid-Test Ratio Also called the “quick ratio” Stringent measure of liquidity Measures entity’s ability to pay its current liabilities immediately POINT: NO INVENTORY!!!!!!

Quick assets Current liabilities Liquidity Ratios Quick ratio (acid test ratio) – if the entity could pay all its current liabilities if they came due immediately –Quick assets - cash, short-term investments, net current receivables- Lets review S8-12(a)

Solvency Measures — The Short-Term Creditor Quick assets: Cash$ 250 Short-Term Investments 170 Accounts receivable (net)220 Total$640 Current liabilities($380+$160)$540 Acid-test S

Solvency Measures — The Short-Term Creditor Acid-Test Ratio Use:To indicate instant debt-paying ability Quick assets: Cash$ 250 Short-term investments 170 Accounts receivable (net)220 Total$640 Current liabilities$540 Quick Ratio 1.19

One day’s sales = Net sales ÷ 365 days Days’ sales in average accounts receivable = Average net accounts receivable ÷ One day’s sales Days’ Sales in Receivables Point: asking how many days of sales sits in accounts receivable

Days’ Sales in Receivables Also called “collection period” How many days does it take to collect the average level of receivables? Lets review S8-12(b)

Days ‘ sales in receivables S8-12(b)Average Accounts Receivable Accounts receivable (net): Beginning of year$ 110 End of year 220 Total$ 330 Average$ 165 Current Year

Solvency Measures — The Short-Term Creditor Number of Days’ Sales in Receivables Use:To assess the efficiency in collecting receivables and in the management of credit. Current Year Average Accounts Receivables$ 165 Net sales on account $2,555 Average daily sales on on account (sales  365)$ 7 Number of days’ sales in receivables24

Sales on Account/ Average Accounts Receivable It assess the efficiency in collecting receivables and the ability of management to manage credit. Lets take a look at S8-12 and compute the Accounts Receivable Turnover Accounts Receivable Turnover

Net sales on account$2,555 Accounts receivable (net): Beginning of year$ 110 End of year 220 Total$ 330 Average$ 165 Current Year

Solvency Measures — The Short-Term Creditor Accounts Receivable Turnover Use:To assess the efficiency in collecting receivables and in the management of credit. Current Year Net Sales on account $2,555 Acct. Receivable (net): Beginning of year$ 110 End of Year220 Total$330 Average$165 Accounts Rec. Turnover 15.5