Chapter 4 Flashcards
Liquidity
A firm’s ability to pay its bill on time. Liquidity is related to the ease and speed with which a firm can covert its non-cash assets into cash, as well as to the size oft the firm’s investment in non-cash assets relative to its short-term liabilities. (Current assets and Acid Test or Quick Ration).
Current ratio
A firm’s current assets divided by its current liabilities. This ration indicates the firm’s degree of liquify by comparing its current assets to its current liabilities.
Current assets = current assets / current liability
Acid-test (quick) ratio
The sum of the firm’s cash and accounts receivable divided by its current liabilities. This ratio is a more stringent measure of liquidity than the current ration because it excludes inventories and other current assets (those that are least liquid) from the numerator.
Acid-test ration = (cash + accounts receivable / current liability)
Days in receivable (average collection period)
A firm’s accounts receivable divided by the company’s average daily credit (annual credit sales / 365). This ratio expresses how many days on average it takes to collect receivable.
Accounts receivable turnover ration
A firm’s credit sales dived by its accounts receivable. This ration expresses how often accounts receivable are “rolled over” during a year.
Days in inventory
Inventory dived by daily cost of goods sold. This ration measures the number of days a firm’s inventories are held on average before being sold; it also indicates the quality of the inventory.
Inventory turnover
A firm’s cost of goods sold dived by its inventory. This ration measure the number of times a firm’s inventory are sold and replaced during the year (that is, the relative liquidity of the inventories)
Operation return on assets
The ration of a firm’s operating profits divided by its total assets. This ration indicates the rate of return being earned on the firm’s assets
Operation management
How effectively management is performing in the day-to-day operations in therms of how well management is generating revenues and controlling costs and expenses; in other words, how well is the firm management the activities that directly affect the income statement?
Assets management
how efficiently management is using the firm’s asset’s to generate sales
Operating profit margin
A firm’s operating profits dived by sales. This ratio serves as an overall measure of operating effectiveness
Total asset turnover
A firm’s sales divided by its total assets. This ratio is an overall measure of asset efficiency based on the relation between a firm’s sales and the total assets
Fixed assets turnover
A firm’s sales dived by its new fixed assets. This ration indicates how efficiently the firm is using its fixed assets
Debt ratio
A firm’s total liabilities dived by its total assets. This ratio measures the extend to which a firm has been financed with debt.
Times interest earned
A firm’s operating profits dived by interest expenses. This ration measures a firm’s ability to meet its interest payment form its annual operating earnings.
