Liquidity Ratios Period 1 Kohei Takata
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Transcript of Liquidity Ratios Period 1 Kohei Takata
Liquidity RatiosBy Kohei Takata
Jun YamadaIl Young Chun
Calvin Kim
Liquidity Ratio
• Assets → cash • Quickly and no loss of value• reveals the level of liquidity• 2 types- Current Ratio/ Acid Test Ratio• Comes from the Balance Sheet
Key Terms
• Liquid assets (Current Assets)- Cash, Debtors, Stock
• Short- term liabilities• Working Capital• Opportunity Cost• Liquidity crisis
Current Ratio
• Liquid assets and short-term liabilities• Working capital• Formula
Current Assets____________
Current Liabilities
Value/ Importance
• Using liquid assets to cover short-term liabilities
• Desirable ratio of 1.5-2.0 to 1• Safety margin• Shows the liquidity position of the firm• Important for trade creditors
Acid Test Ratio
• Current assets and short- term liabilities (working capital)- stock
• FormulaCurrent Assets- Stock_________________
Current Liabilities
Value/ Importance
• More meaningful than Current Ratio • At least 1:1• Important for potential investors and short-
term lenders (exposes the level of risk)• Can determine 2 things: – experiencing a liquidity crisis– holding too much current assets
Limits of Liquidity Ratios
• Ratios – (historical account of a firm’s performance)
• Qualitative factors- ignored• Organizational objectives differ between
businesses (misleading) Ex. Supermarkets and Jewelry shops
Example: Current Ratio
Company ACurrent Assets: 500,000Stock: 200,000 Cash: 100,000 Debtors: 200,000Current Liabilities: 350,000
500,000_________
350,000Current Ratio- 1.43:1
Meaning: For every $1 of current liabilities, the firm has $1.43 of current assets
Example: Acid Test RatioCompany A
Current Assets: 500,000Stock: 200,000 Cash: 100,000 Debtors: 200,000Current Liabilities: 350,000
(500,000- 200,000)= 300,000_______________
350,000Acid Test Ratio- 1:1.12
Meaning: For every $1.12 of current liabilities, the firm has $1 of (current assets- stocks) = Possible that the firm is experiencing
a LIQUIDITY CRISIS!!
Practice: Ho Gam Soft Drinks
Works cited
• Hoang, Paul. Business and Management. Victoria: IBID, 2007. Print.• BusinessDictionary.com - Online Business Dictionary. Web. 11 Nov.
2009.<http://www.businessdictionary.com/>.• Digital image. BNET. 25 May 2009. Web. 15 Nov. 2009.
<http://i.bnet.com/blogs/credit_cards.jpg>. • Digital image. Naq Computer Systems. Web. 15 Nov. 2009.
<http://www.naqcomputers.com/sales/inventory_large.jpg>. • Digital image. World Press. Web. 15 Nov. 2009.
<http://jshurwitz.files.wordpress.com/2009/10/cash-wad.jpg>.