FAR 2.7 - Ratio Analysis Flashcards
What are the 4 key financial ratio classifications?
Liquidity ratios
Activity ratios
Profitability ratios
Coverage ratios
Measures of a firm’s short term ability to pay maturing obligations
Liquidity ratios
Current ratio calculation:
Current assets / current liabilities
Quick ratio calculation:
Current assets - inventory / current liabilities
Should liquidity ratios be higher or lower?
Higher the ratio, Lower the risk
Measures how effectively an enterprise is using its assets:
Activity ratio
Should turnover ratios be higher or lower?
Higher the better
Accounts receivables turnover calculation:
Sales / Average AR
Days sales in AR calculation:
Ending AR / (sales / 365)
Inventory turnover calculation:
COGS / Average Inventory
Days in inventory calculation:
Ending inventory / (COGS / 365)
Accounts payable turnover calculation:
COGS / average AP
Days of payables outstanding calculation:
Ending AP / (COGS / 365)
Cash conversion cycle calculation:
Days sales in AR + Days in inventory - Days of payables outstanding
Asset turnover calculation:
Sales / average total assets