Answer = a: A high current ratio may imply that the company is carrying a lot of current assets on the books and these assets might be better utilized if the company invested or converted these assets into long-term investments. Generally, a business generates a return on its long-term assets and not its liquid or current assets such as cash, accounts receivable, or inventory. These types of assets are sitting around – idle. They don’t produce or generate sales or service customers like your long-term investments in technology would. You gain little by holding idle assets (including non-productive fixed assets) and you tend to gain much more by investing into longer term investments that provide solutions to your customers, make your employees more productive, etc.
If we have cash of $ 1,500, accounts receivables of $ 25,500 and current liabilities of $ 30,000, our quick or acid test ratio would be:
Answer = d: If you add up your highly liquid assets ($ 1,500) of cash and accounts receivable ($ 25,500), you have total liquid assets of $ 27,000. Now divide this by the total current liabilities of $ 30,000 = .90. For every $ 1.00 of current liabilities, we have $ .90 of liquid assets to cover these liabilities.
The number of times we convert receivables into cash during the year is measured by:
Answer = c: The Accounts Receivable Turnover ratio measures the number of times you turn receivables over into cash. It is calculated by dividing your credit sales by the average receivable balance for the period. For example, if you had credit sales for the year of $ 100,000 and your average receivable balance during the year was $ 10,000, then you have a receivable turnover of 10.
If our cost of sales are $ 120,000 and our average inventory balance is $ 90,000, then our inventory turnover rate is: