Even More Financial Ratios Ch 9 Pt. 4

USING THE INFORMATION IN THE FINANCIAL STATEMENTS Financial ratios are calculated to evaluate the short-term liquidity of a company. These ratios include the 1. current ratio, 2. acid test (quick) ratio, 3. receivables turnover ratio, and the 4. collection period ratio.

CURRENT RATIO The current ratio (working capital ratio) is a widely used measure for evaluating a company’s liquidity and short-term debt-paying ability. CURRENT ASSETS CURRENT RATIO = ____________________ CURRENT LIABILITIES

ACID TEST RATIO The acid test ratio (quick ratio) is a measure of a company’s short-term liquidity. CASH + TEMPORARY INVESTMENTS + RECEIVABLES (NET) ACID TEST RATIO = ———————————————————————————— CURRENT LIABILITIES

ACCOUNTS RECEIVABLE TURNOVER RATIO The ratio used to assess the liquidity of the receivables is the receivables turnover ratio. Net Credit Average Net Receivables Sales Receivables Turnover  =

Days in Year Receivables Collection (365) Turnover Period in Days COLLECTION PERIOD The collection period in days is a variant of the receivables turnover ratio and makes liquidity even more evident. The general rule is that the collection period should not exceed the credit term period. Days in Year Receivables Collection (365) Turnover Period in Days  =