Liquidity Ratios. SO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Acid-Test.

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Presentation transcript:

Liquidity Ratios

SO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Compute the Acid-Test Ratio for Liquidity Ratios Illustration 14-13

SO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis The acid-test ratio measures immediate liquidity. Liquidity Ratios

SO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis It measures the number of times, on average, the company collects receivables during the period. Liquidity Ratios

SO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis A variant of the receivables turnover ratio is to convert it to an average collection period in terms of days. This means that receivables are collected on average every 36 days. Liquidity Ratios 365 days / 10.2 times = every days

SO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Inventory turnover measures the number of times, on average, the inventory is sold during the period. Liquidity Ratios

SO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis A variant of inventory turnover is the days in inventory. Inventory turnover ratios vary considerably among industries. Liquidity Ratios 365 days / 2.3 times = every 159 days

SO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Liquidity Ratios Illustration Summary of liquidity ratios

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