MERCER BAA 510 - Liquidity Ratios - Short-Term Solvency (10 pages)

Previewing pages 1, 2, 3 of 10 page document View the full content.
View Full Document

Liquidity Ratios - Short-Term Solvency



Previewing pages 1, 2, 3 of actual document.

View the full content.
View Full Document
View Full Document

Liquidity Ratios - Short-Term Solvency

29 views


Pages:
10
School:
Mercer University
Course:
Baa 510 - Fundamentals of Accounting and Finance

Unformatted text preview:

Liquidity Ratios Short Term Solvency Current Ratio 2002 2001 Current assets Current liabilities The current ratio is a commonly used measure of short run solvency the ability of a firm to meet its short term debt requirements as they come due The available cash resources to satisfy these obligations must come primarily from cash or the conversion to cash of other current assets such as accounts receivable and inventories Accounts receivable and inventory may not be truly liquid A firm could have a relatively high current ratio but not be able to meet demands for cash because the accounts receivable are of inferior quality or the inventory is salable only at discounted prices Quick Ratio 2002 2001 Current assets inventory Current liabilities The quick ratio is a more rigorous test of short run solvency that the current ratio because the numerator eliminates inventory considered the least liquid current asset and the most likely source of losses Cash Flow Liquidity Ratio 2002 2001 Cash Mkt Securities CFOa Current liabilities a Cash flow from operating activities Another approach to measuring short term solvency is the cash flow liquidity ratio which considers cash flow from operating activities from the statement of cash flows The cash flow liquidity ratio uses in the numerator as an approximation of cash resources cash and marketable securities which are truly liquid current assets and cash flow from operating activities which represents the amount of cash generated from the firm s operations such as the ability to sell inventory and collect the cash It is helpful to compare this ratio to the current and quick ratios Contradictory pictures between this ratio and other liquidity ratios should be investigated thoroughly because ultimately companies need cash to pay high bills High current and quick ratios combined with low or negative cash flow liquidity ratios could signal problems Cash Flow From Operation One of the most important numbers in all of the financial



View Full Document

Access the best Study Guides, Lecture Notes and Practice Exams

Loading Unlocking...
Login

Join to view Liquidity Ratios - Short-Term Solvency and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Liquidity Ratios - Short-Term Solvency and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?