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chapter 22.docx

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University of Calgary
ACCT 301

Chapter 22 Short-Term Solvency Working Capital (Current) Ratio = Current Assets: 1 Current Liabilities 1. The ability to pay debts as they fall due 2. The rate of stock turnover must be considered, since the lower it is, the more stock there is. 3. The average ratio for the industry and the economy must also be considered. 4. A ratio below 1 means that a company may not be able to pay its short term debts Liquidity (Quick) Ratio = Current Assets - Stock:1 Current Liabilities 1. One must carefully consider which of the current assets to include or omit. 2. Stocks should be normally excluded, as well as prepayments. 3. All liabilities should be included, but one must understand the significance of including tax which is usually paid within 9 months, and an overdraft, which is a revolving source of finance. 4. A ratio below 1:1 usually causes a company great difficulty in meeting its debts as they fall due. 5. An excess of 1:1 means that the company is in possession of surplus cash, although solvent, there must be some doubt whether it is making the best use of available resources. Longer-Term Financial Strength Proprietorship Ratio = Shareholders' Equity X 100 Total Sources of Finance 1. The proportion of business assets financed b
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