COB 242 1st Edition Lecture 1 Outline of Current Lecture 1. Financial statement analysisa. Liquidity ratiosi. Working capitalii. Current ratioiii. Acid-testb. Asset Managementi. Accounts receivable turnoverii. Average collection periodiii. Inventory turnoveriv. Average Sale Periodv. Operating Cyclevi. Total Asset TurnoverCurrent Lecture1. Financial statement analysis- use ratios to compare companies despite different sizesa. Look beyond ratios:i. Industry trendsii. Technological changesiii. Changes within the company…2. Liquidity Ratiosa. Liquidity- how fast you can change something to cash and pay of debtsb. Working Capital- the excess of current assets over current liabilitiesi. Current assets - current liabilities = working capitalc. Current ratio- measures a company’s short term debt paying abilityi. Current assets / current liability = current ratioii. Declining ratio may be a sign of deteriorating financial condition or it could be from eliminating obsolete inventoriesiii. A current ratio < 1 means they can’t pay debts (except for in some industries)d. Acid-test (Quick ratio)- measures a company’s ability to meet obligations without having to liquidate inventoryi. Quick assets = cash + marketable securities + accounts receivable + notes receivable ii. Quick assets / current liabilities = acid testThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.3. Asset Managementa. Accounts receivable turnover- measures how many times a company converts its receivables into cash each yeari. Sales on account / average accounts receivable = accounts receivable turnoverii. Average accounts receivable = (previous years ending accounts receivablebalance + current years ending accounts receivable balance)/2b. Average Collection Period- measures, on average, how many days it takes to collect on accounts receivablei. 365 days / accounts receivable turnover = average collection periodc. Inventory Turnover- measures how many times a company’s inventory has been sold and replaced during the yeari. Cost of goods sold / average inventory = inventory turnoverii. Average inventory = (beginning inventory balance + ending inventory balance)/2iii. If the inventory turnover is less than industry average it either has excessive inventory or the wrong types of inventory d. Average Sale Period- measures how many days, on average, it takes to sell the entire inventoryi. 365 days / inventory turnover = average sale periode. Operating Cycle- measures the elapsed time form when inventory is received from suppliers to when cash is received from customersi. Average sale period + average collection period = operating cyclef. Total Asset Turnover- measures how efficiently a company’s assets are being usedto generate salesi. Sales / average total assets = total asset turnoverii. Average total assets= (beginning total assets balance + ending total