Chapter 10, Problem 8CP

To determine

Introduction:

1. Current ratio: It is a type of financial ratio that displays the proportion of current assets and current liabilities. It is an indicator of the company’s liquidity status. In other words, it implies that a large amount of current assets which is in relationship with a small amount of current liabilities provides some assurance that obligations that are due will be paid for.

2. Acid-test ratio: The acid test ratio is also known as the quick ratio. It is a liquidity ratio that helps in measuring the ability of a company to pay-off its current debts with only quick assets. Quick assets are also known as cash equivalents. They are current assets that can be promptly and easily converted into cash in the current period. Examples of such assets include cash, current receivables and short-term investments.

3. Cash ratio: Cash ratio of a company is the ratio of cash and cash equivalents to its current liabilities. As only cash and cash equivalents are compared with the current liabilities, it is an extreme liquidity ratio. It assists in measuring the ability of a business to repay its current liabilities by using only its cash and cash equivalents.

4. Accounts receivable turnover: The accounts receivable turnover ratio is an efficiency ratio that helps in measuring the frequency of the collection of receivables during a period of time. It also estimates the liquidity and quality of the customer account balances. The accounts receivable turnover displays the number of times a company can collect its average total accounts receivable during a specific accounting period.

5. Day’s sales in receivables: Day’s sales in receivable refer to the amount of money owed by the customers for sales made to them on credit. By dividing the outstanding receivables by the average daily sales value, an estimate for the number of days’ sales in accounts receivable can be achieved.

6. Asset turnover: Asset turnover ratio estimates the value of the sales or revenues of a company generated relative to the value of its assets. The asset turnover ratio generally indicates the efficiency with which a company is using its assets to generate revenues.

7. Rate of return on total assets: Return on assets, often called return on total assets, is a financial ratio that is used to estimate the profitability and efficiency that a company can generate with its income producing assets.

To calculate: The Company’s success for the first year of operations by calculating the given ratios.