BU227 Lecture Notes - Preferred Stock, Asset, Current Liability
Document Summary
Type 1: measuring ability to pay current liabilities. Current ratio: measures the company"s ability to pay current liabilities with current assets, rule of thumb is 1. 5:1. Acid test ratio: shows the company"s ability to all current liabilities if they come due immediately, rule of thumb is 1:1. = (cash + short term investments + net receivables) / current liabilities. Type 2: measuring ability to sell inventory and collect receivables. = cost of goods sold / average inventory. Accounts receivable turnover: measures a company"s ability to collect cash from credit customers, too high may mean credit is too tight, losing sales to good customers, too low may mean credit terms are loose. = net credit sales / average net accounts receivable. Days sales in receivables: measures how many days sales remain as accounts receivable. = average net accounts receivables / (net sales / 365) Type 3: measuring ability to pay long-term debt.