Explanation Match the given ratio with the appropriate formula used to compute it. Ratio Formula 1 Working capital c. Current assets − Current liabilities 2 Current ratio l. Current assets Current liabilities 3 Quick ratio g. Current assets − Inventory − Prepaid expenses Current liabilities 4 Accounts Receivable turnover k. Net credit sales Average net receivables 5 Average days to collect i. 365 Accounts receivable turnover 6 Inventory turnover b. Cost of goods sold Average inventory 7 Average days to sell inventory d. 365 Inventory turnover 8 Debt-to-assets ratio h. Total liabilities Total assets 9 Debt-to-equity j. Total liabilities Total stockholders' equity 10 Return on Investment e . Net income Average total assets 11 Return on equity a. Net income Average total stockholders' equity 12 Earnings per share f. Net income - Perfererred dividend [ Average outstanding common shares ] Table (1) Explanation for the above ratios: 1. Working capital: Working capital refers to the excess amount of current assets over its current liabilities of a business. It measures the excess funds that are required for the companies to carry out their day to day operations. Working capital is calculated by using the formula: Working capital = Current assets − Current liabilities 2. Current ratio: Current ratio is one of the liquidity ratios, which measures the capacity of the company to meet its short-term obligations using its current assets. The ideal current ratio is 2:1. The following formula is used to calculate current ratio. Current ratio = Current Assets Current Liabilities 3. Quick Ratio: It is a ratio used to determine a company’s ability to pay back its current liabilities by liquid assets that are current assets except inventory and prepaid expenses. Quick Ratio = Quick Assets Current Liabilities 4

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ISBN: 9781264010653

Author: Edmonds

Publisher: MCGRAW-HILL HIGHER EDUCATION

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Chapter 9, Problem 14E

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Ch. 9 - 1. Why are ratios and trends used in financial...Ch. 9 - Prob. 2Q Ch. 9 - Prob. 3Q Ch. 9 - 4. What is the significance of inventory turnover,...Ch. 9 - 5. What is the difference between the current...Ch. 9 - Prob. 6Q Ch. 9 - Prob. 7Q Ch. 9 - Prob. 8Q Ch. 9 - 9. What are some limitations of the earnings per...Ch. 9 - Prob. 10Q

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