Business Administration - Management FIS403 Lecture Notes - Lecture 3: Write-Off
30 May 2018
School
Department
Professor
Liquidity Ratios
Use the following information to answer the questions.
Year 1 Year 2 Year 3 Year 4 Year 5
current
Current Ratio 2.75x 2.55x 2.15x 1.90x 1.65x
Quick Ratio 1.13x 1.06x 1.00x 1.02x 1.05x
1.Evaluate the company’s liquidity position.
2.A large debt payment becomes due next year. What impact will this
have on its Current Ratio?
3.If the company wrote down its inventory value due to obsolescence,
what impact will it have on the Current and Quick Ratios?
Liquidity Ratios
Question 2
A large debt payment due would increase Current Liabilities.
This would cause a decrease in the value of the Current Ratio –
if all other items were relatively unchanged.
Question 3
A writedown of the value of Inventory reduces the Current Ratio
because the value of current assets declines.
The Quick Ratio would not change because inventory is excluded
from the calculation.
Debt Utilization Ratios
Also known as risk analysis ratios
Purpose:
❖ Can company pay its interest charges?
❖Can company repay its debt in the long term?
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