FAR-26 RATIOS

Question 1

Six Ratios Regularly Tested

Answer 1

Current Ratio Quick (acid test) ratio

Inventory turnover ratio

Number of day’s sales in average inventory

Receivables turnover ratio

Number of day’s sales in average receivables

Question 2

Working Capital

Answer 2

-measures company’s solvency

Working Capital = Current assets - Current liabilities

Question 3

Current Ratio

Answer 3

-measures short term debt paying abilities

Current Ration = Current Assets / Current Liabilities

Question 4

Quick Acid Test Ratio

Answer 4

-measures immediate short-term liquidity

Formula = Cash, MKT securities, & A/R / current liabilities

OR

Quick ratio = Current assets (excluding Inventories and Prepaid assets) ÷ Current liabilities

Question 5

Receivables turnover

Answer 5

-measures liquidity of receivables

Receivables Turnover = Credit sales / Avg receivables (net)

Avg Receivables = Beginning + Ending/2

Question 6

Inventory turnover

Answer 6

-measures liquidity of inventory

Formula = COGS / Avg Inventory

COGS = Beg inv + Purchases - End Inv

Avg Inv = Beg + Ending / 2

Question 7

Number of Day’s supply in average inventory

Answer 7

-measures number of days required to sell inventory Formula = avg inventory / Inventory Turnover or Formula = avg inventory / avg daily cogs***

or

= Inventory Turnover / 365

Question 8

Number of Day’s sales in average receivables

Answer 8

-measures number of days required to collect receivables Formula = avg receivable / receivables turnover or Formula = avg receivables / daily credit sales*** Daily credit sales = credit sales / working days per yr

or

= Receivables Turnover / 365