1. 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
Free Jan. 2014
Available on the Google Play Store

3. 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.

4. 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.

5. 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

6. Liquidity Ratios: Current Ratio
Current assets / Current liabilities

7. 20X1: 49,000/23,000 = 2.13
20X2: 48,000/17,000 = 2.82

8. Coverage Current Current Assets Current Liabilities Current Assets

9. “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.”

10. 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

11. 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)

12. 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

13. 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)

14. 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

15. 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

16. 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
Free Jan. 2014
Available on the Google Play Store