Introduction to Accounting Preparing for a User’s Perspective Liquidity Ratios: Current Ratio Debits and Credits Trainer By Kevin C. Kimball, CPA with support from www.canvas.net Free Jan. 2014 Available on the Google Play Store
Liquidity Ratios 1) Current Ratio Current assets / Current liabilities 2) Quick Ratio (Current assets – inventories)/ Current liabilities 3) Working Capital (Current assets – Current liabilities) Days of inventory outstanding + Days sales outstanding - Days payables outstanding 4) Cash Conversion Cycle Liquidity: Ability to pay off current liabilities as the come due within the next year.
Solvency Ratios 1) Debt-Equity Ratio Total liabilities / Total equity 2) Debt-Assets Ratio Total liabilities / Total assets Solvency: Ability to pay off its current and non-current liabilities as the come due.
No more investments in you!!! No more credit for you!!! No more investments in you!!! Accounts Receivable due from Mr. Bear Illiquid and/or insolvent
Liquidity Ratios: Current Ratio Current assets / Current liabilities
20X1: 49,000/23,000 = 2.13 20X2: 48,000/17,000 = 2.82
Coverage Current Current Assets Current Liabilities Current Assets
“Its current ratio is greater than 2? Oh, it must be pretty liquid.” “Its current ratio is less than 1? Oh, it must be illiquid.”
Timing of outflows cash flow difficulties can result Current Ratio Current Assets Inflows Current Liabilities (Outflows) = If timing of inflows Timing of outflows cash flow difficulties can result
Current Ratio Current Assets Current Liabilities $0 $0 $0 $41 ($23) $0 (Example in 000’s) Jan Feb Mar Apr Current Assets $0 $0 $0 $41 Inflows Current Liabilities (Outflows) ($23) $0 $0 $0 $ 8 (15) (15) (15) Beginning cash or (cash deficiency) (15) (15) (15) $26 Ending cash or (cash deficiency)
2% off How can a CFO avoid the noted cash flow deficiencies? a) open a bank line of credit Open line of credit up to $15 k b) sell some long-term assets for cash c) renegotiate payment terms with its suppliers 2% off d) provide a cash discount to customers $15 k for 10% ownership? e) obtain a cash infusion from owners
Current Ratio Current Assets Current Liabilities $41 $0 $0 $0 $0 $0 $0 (Example in 000’s) Jan Feb Mar Apr Current Assets $41 $0 $0 $0 Inflows Current Liabilities Outflows $0 $0 $0 ($23) $8 $49 $49 $49 Beginning cash or (cash deficiency) $49 $49 $49 $26 Ending cash or (cash deficiency)
2% off How can CFO’s manage excess cash inflows? a) Save the cash at a higher interest rate Savings accounts or CDs at higher rates b) Invest the cash in s/t marketable securities c) Pay off current liabilities early to receive discounts 2% off Cash deficiencies Cash surpluses
LAC 20X1: 49,000/23,000 = 2.13 versus 20X2: 48,000/17,000 = 2.82 OR versus Source: bizstats.com YouTube Video: Obtain key financial ratios using bizstats.com website
Introduction to Accounting Preparing for a User’s Perspective Liquidity Ratios: Current Ratio Debits and Credits Trainer By Kevin C. Kimball, CPA with support from www.canvas.net Free Jan. 2014 Available on the Google Play Store