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Objective 5

Objective 5. Calculate the acid-test ratio and days’ sales in receivables. Acid-Test Ratio. Also called the “quick ratio” Stringent measure of liquidity Measures entity’s ability to pay its current liabilities immediately. (Cash + Short-term investments + Net current

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Objective 5

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  1. Objective 5 Calculate the acid-test ratio and days’ sales in receivables

  2. Acid-Test Ratio • Also called the “quick ratio” • Stringent measure of liquidity • Measures entity’s ability to pay its current liabilities immediately (Cash + Short-term investments + Net current receivables) ÷ Total current liabilities POINT: NO INVENTORY!!!!!!

  3. Liquidity Ratios • Quick ratio (acid test ratio) – if the entity could pay all its current liabilities if they came due immediately • Quick assets - cash, short-term investments, net current receivables- Lets review S8-12(a) Quick assets Current liabilities

  4. Solvency Measures — The Short-Term Creditor Acid-test S8-12 2012 Quick assets: Cash $ 250 Short-Term Investments 170 Accounts receivable (net) 220 Total $640 Current liabilities($380+$160) $540

  5. Solvency Measures — The Short-Term Creditor Acid-Test Ratio 2012 Quick assets: Cash $ 250 Short-term investments 170 Accounts receivable (net) 220 Total $640 Current liabilities $540 Quick Ratio1.19 Use: To indicate instant debt-paying ability.

  6. Days’ Sales in Receivables One day’s sales = Net sales ÷ 365 days Days’ sales in average accounts receivable = Average net accounts receivable ÷ One day’s sales Point: asking how many days of sales sits in accounts receivable

  7. Days’ Sales in Receivables • Also called “collection period” • How many days does it take to collect the average level of receivables? • Lets review S8-12(b)

  8. Days ‘ sales in receivables S8-12(b)Average Accounts Receivable Current Year Accounts receivable (net): Beginning of year $ 110 End of year 220 Total $ 330 Average $ 165

  9. Solvency Measures — The Short-Term Creditor Number of Days’ Sales in Receivables Current Year Average Accounts Receivables $ 165 Net sales on account $2,555 Average daily sales on on account (sales  365) $ 7 Number of days’ sales in receivables24 Use: To assess the efficiency in collecting receivables and in the management of credit.

  10. Accounts Receivable Turnover Sales on Account/ Average Accounts Receivable It assess the efficiency in collecting receivables and the ability of management to manage credit. Lets take a look at S8-12 and compute the Accounts Receivable Turnover

  11. Accounts Receivable Turnover Accounts Receivable Turnover Current Year Net sales on account $2,555 Accounts receivable (net): Beginning of year $ 110 End of year 220 Total $ 330 Average $ 165

  12. Solvency Measures — The Short-Term Creditor Accounts Receivable Turnover Current Year Net Sales on account $2,555 Acct. Receivable (net): Beginning of year $ 110 End of Year 220 Total $330 Average $165 Accounts Rec. Turnover 15.5 Use: To assess the efficiency in collecting receivables and in the management of credit.

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