TEST OF OVER-ALL SHORT-TERM SOLVENCY OR SHORT-TERM FINANCIAL POSITION

Net Sales Indicates adequacy of working capital to support

Working Capital Turnover
Average Workng Capital operation (sales).
Current Liabilities
Defensive Interval Ratio Measure coverage of current liabilities.
Cash & Cash Equivalents
Net Purchases Measures efficiency of the company in meeting the
Payable Turnover
Average Accounts Payable accounts payable.
Fixed Asset to Long-Term Fixed Assets Reflects extent of the utilization of resources from long-
Liabilities Long-Term Liabilities term debt. Indicative of sources of additional funds.

RATIOS INDICATIVE OF INCOME POSITION

Rate of Return on Average Income

Measures the probability of current assets invested.
Current Assets Average Current Assets
Operating Profit Measures profit generated after consideration of
Operating Profit Margin
Net Sales operating costs.
Operating Cash Flow Measures the ability of the firm to translate sales to
Cash Flow Margin
Net Sales cash.

TEST OF LIQUIDITY (Liquidity refers to the company's ability to pay its current liabilities as they fall due).

Current Ratio Current Assets It is a measure of adequacy of working capital. It is the

(Banker's Ratio) primary test of liquidity to meet current obligations from
(Working Capital Ratio) Current Liabilities current assets.

Quick Assets It measures the number of times that the current

Quick Ratio liabilities coud be paid with th available cash and near-
(Acid Test Ratio) cash assets (i.e., cash, current receivables and
Current Liabilities marketable securities).

WORKING CAPITAL ACTIVITY RATIOS (EFFENCIENCY RATIOS)

Income Statement Account

Turnover
Average Balance Sheet Account
Number of days in a year
Average Age
Turnover
Net Credit Sales It measures the number of times receivables are
Receivable Turnover
Average Receivables recorder and collected during the period.
Average Age of Receivables 360 days It indicates the average number of days during which
(Average Collection Period) the company must wait before receivables are
(Days' Sales in Receivables) Receivabes Turnover collected.
Cost of Goods Sold It measures the number of times that the inventory is
Inventory Turnover
replaced during the period.
 It measures the number of times that the inventory is
Inventory Turnover
Ave. Merchandise Inventory replaced during the period.

Average Age of Inventory* 360 days It indicates the average number of days during which
(Inventory Conversion Period) the company must wait before receivables are
(Days' Sales in Inventory) Inventory Turnover collected.
Cost of Materials Used
Raw Materials Turnover
Average Raw Material Inventory
Cost of Goods Manufactured
Work in Process Turnover
Average Work in Process Inventory
Cost of Goods Sold
Finished GoodsTurnover
Average Finished Goods Inventory
Normal Operating Cycle Average Age of Inventory + Average Age of Receivables
Net Credit Purchase
Trade Payables Turnover
Average Trade Payables
Average Age of Trade Payables 360 days It indicates the length of time during which payables
(Payable Deferral Period) (Days'
Payables Turnover remain unpaid.
Purchases in Payables)
Cost of Sales + Operating
Expenses ** It measures the movement and utilization of current
Current Assets Turnover
assets to meet operating requirements.
Average Current Assets
* In some accounting and finance texts, average inventory age is also called as average sales period.
** These exclude depreciation, amortization and other expenses related to long-term assets.

TEST OF SOLVENCY (Solvency refers to the ability of company to pay its debt)
These ratios involve leverage ratios. 'Leverage' refers how much of company's resources are financed by debt and/or
preferred equity, both of which require fixed payment of interests and dividends.

EBIT It determines the extent to which operations cover

Times Interest Earned
Interest Expense interest expense.
Total Liabilities Proportion of assets provided by creditors compared to
Debt-Equity Ratio
Total Equity that provided by owner.
Total Liabilities
Debt Ratio Proportion of total assets provided by creditors.
Total Assets
Total Equity
Equity Ratio Proportion of total assets provided by owners.
Total Assets

TEST OF PROBABILITY

Income Determines the portion of sales that went into

Return on Sales
Net Sales company's earnings
Income Efficiency with which assets are used to operate the
Return of Assets
business.
 Efficiency with which assets are used to operate the
Return of Assets
Average Assets business.

ISSUE: What INCOME figure should be used?

> If the intention is to measure operational performance, income is expressed as before interest and tax;