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BU121 Study Guide - Asset, Current Liability, Cash Flow


Department
Business
Course Code
BU121
Professor
Roopa Reddy

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Why Evaluate Financial Performance?
-Looking to see if a company is profitable and if they are good with their money
-Government, competitors, creditor, investors, and employees look at these finances
Ratio
Ratio Name
Category
Formula
Benchmark
Definition
Current Ratio
Liquidity
average current assets
average current liabilities
Greater than 2
Less than 4
Ability to pay short term
obligations
Acid Ratio
Liquidity
(Average Current Assets
Average Inventories)
Average Current Liabilities
Greater than 1
How quickly your assets
can turn to cash
excluding Inventory
NWC Net Working
Capital to Total
Assets Ratio
Liquidity
Average current assets average
current liabilities
Average total assets
The higher the
more liquid you
are
How much money you
have to work with after
you pay your debt
Inventory to Sale
Conversion
Period
average inventory
Cost of goods sold / 365
How long it takes for your
inventory to be sold
days
Sale to Cash
Conversion
Period
Average receivables
Net sales / 365
Want close to 0
How long it takes for you
to collect that money
-you have to line up with
when you owe money so
you have cash flow
Average Operating
Cycle
Conversion
Period
inventory to sale + sale to cash
How long it takes for
inventory to convert to
sale and then the sale to
actual cash
Purchase to
Payment
Conversion
Period
Average payables + average
accrued liabilities
Cost of goods sold / 365
-the higher it is,
the more you
rely on credit
How long it takes to pay
things off
Cash Conversion
Cycle (C3)
Conversion
Period
Inventory to Sale + Sale to Cash
Purchase to Payment
Want to be as
close to 0 as
possible so
you pay your
bills on time
keep cash flow
-looking at everything as
a whole selling your
inventory, getting cash,
and paying off your debt
Total Debt to Total
Assets
Leverage
average total debt
Average total assets
How much debt you have
compared to how many
assets you have
Debt to Equity
Leverage
average total debt
average owner’s equity
How much debt you owe
compared to how much
money you have (from
equity)
-5:1 $5 in debt to $1
dollar in equity
(compare to the industry)
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