Microsoft Office Tutorials and References
In Depth Information
Financial Statements and Ratios
When this ratio is greater than 1:1, it’s the same as when Net Working Capital is positive.
The final liquidity ratio is the Quick Ratio. Although the Current Ratio includes assets, such as
inventory and accounts receivable that will be converted into cash in a short time, the Quick
Ratio includes only cash and assets that can be converted into cash immediately.
A Quick Ratio greater than 1:1 indicates that the company can pay all its short-term liabilities
right now.
The following custom number format can be used to format the result of the Current
Ratio and Quick Ratio:
Asset use ratios
Asset use ratios measure how efficiently a company is using its assets: that is, how quickly the
company is turning its assets back into cash. The Accounts Receivable Turnover ratio divides
sales by average accounts receivable:
Accounts Receivable Turnover is then used to compute the Average Collection Period:
The Average Collection Period is generally compared against the company’s credit terms. If the
company allows 30 days for its customers to pay and the Average Collection Period is greater
than 30 days, it can indicate a problem with the company’s credit policies or collection efforts.
The efficiency with which the company uses its inventory can be similarly computed. Inventory
Turnover divides cost of sales by average inventory:
The Average Age of Inventory tells how many days inventory is in stock before it is sold:
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