It may be assumed for the number of days in a year as or In fact these two ratios are inter-related. Average inventory and Cost of goods sold are the constituents of the ratio.
Liquid Ratio is a more rigorous test of liquidity than current ratio. As regards sales, the ratio is best expressed when the average inventory is compared with the cost of goods sold. When credit sales figure is not given the total sales may be considered for computation.
Average inventory is calculated by taking the stock levels of finished goods, raw materials, and work in process at the opening and closing dates. In such cases, the inventory turnover ratio and its constituent parts may be calculated as follows: Establishing a standard is very difficult as it will be a matter for the management to decide about proper cash and bank balances, considering possible future requirements, which may vary from time to time, and from business to business.
However, this ratio is not in much use.
The ratio for liquidity inventory turnover for berrys bug blaster high creditors turnover ratio signifies that the creditors are being paid promptly thus boosting up the credit worthiness of the firm.
The Current Ratio, Liquid Ratio and Absolute Liquidity Ratio generally indicate the adequacy of current assets for meeting current liabilities. Besides being an index of liquidity of a firm showing the rate at which inventories are converted into sales and then into cash, this ratio helps the finance manager to evaluate the inventory policy.
If the monthly figures are not available, then adding could derive the average inventory stock levels at the opening and closing dates and dividing by two.
The following factors may be given due consideration while using the inventory turnover ratio: Receivables constitute an important component of current assets and therefore the quality of receivables determines the liquidity of a firm to a greater extent.
It is also known as Stock Turnover Ratio. However, when cost of goods is not known, the ratio of net sales sales less returns to average inventory may be used as substitute.
It is to be observed that receivables are excluded from the list of liquid assets. Average collection period indicates the quality of debtors by measuring the rapidity or slowness in the collection process. It is calculated as follows: A very low ratio may signify that the firm is not taking full advantage of credit facilities allowed by the creditors.
Hence, for a meaningful analysis, they should be compared with similar ratios in the previous period, or with the ratio of other similar firms. When ratios fall out of standards, the reasons for such results should be ascertained, and then conclusions can be arrived at.
It signifies the credit period enjoyed by the firm in paying creditors. Hence, it should be remembered while arriving at conclusions that though technically inventories are not immediately available to meet current liabilities, to some extent, they do generate cash during normal course of business.
A standard of 0. A shorter collection period implies prompt payment by debtors, while longer period implies a too liberal and inefficient credit collection performance.
It is very difficult to establish standards for this ratio because it will differ from industry to industry. When a liberal credit policy may result in more bad debts and over-investment in receivables, a restrictive policy may result in lower sales and resultant lower profits.
Some authorities recommend that liquid ratio may be computed comparing current liabilities with liquid assets. However, the criterion for such classification depends upon the purpose for which the liquid ratio is used.
It will indicate whether the cash and bank balances are in tune with the actual payments. Important ratios under the secondary category are as follows: From the figures given in Example 1, the liquid ratio may be calculated as follows: Similarly a high turnover ratio may be due to under-investment in inventories.
For example, a manufacturing company may have a weak liquid ratio in time of prosperity, for increased activity may result in huge stocks and holding of less cash. In other words, this ratio indicates that 50 paise worth of absolute liquid assets are sufficient to meet one rupee worth of liquid liabilities.
From the following particulars calculate Stock Turnover Ratio: To be more realistic the ratio should be calculated using the same units as numerator and denominator. An increasing trend in the volume of business may necessitate large inventories, and vice versa.
In other words, the firm could meet its liquid liabilities without resorting to the sale of inventories. Hence, the nature of season, i.
When monthly inventory figures are available, the average inventory is calculated by taking the inventory level at the opening date plus inventory levels at the end of each month, adding them up and then dividing by thirteen.Read this essay on Profability Ratios. Come browse our large digital warehouse of free sample essays.
This is the profitability ratio analysis for Berry’s Bug Blasters in ratio Net Sales $35, $69, Inventory Turnover Cost of goods sold $ = $1, Oracle +/2 Average Inventory $ $1, Microsoft +/2. O What the liquidity, profitability, and solvency ratios tell you about the financial position of the company?
o Which - Answered by a verified Business Tutor o Inventory turnover. Profitability ratios. o Asset turnover; o Profit margin Ask Your Own Essays Question. Customer reply replied 6 years ago. oh sorry I selected Berrys Bug.
Team D chose Berry's Bug Blasters as our virtual company.
We chose use the financial statements from the year through for this comparison. The ratio calculations we will show are liquidity, profitability, and solvency. The Ratio For Liquidity Inventory Turnover For Berrys Bug Blaster.
FINANCIAL RATIOS 2 Liquidity Ratios Liquidity ratios measure a business' capacity to pay its debts as they come due. It also measures the cooperative’s ability to meet short-term obligations. Liquidity ratios. Current ratio; Acid-test, or quick, ratio; Receivables turnover; Inventory turnover; Profitability ratios.
Asset turnover; Profit margin; Return on assets; Return on common stockholders’ equity; Solvency ratios. Debt to total assets; Times interest earned; Show your calculations for.
Both the receivables turnover ratio and Inventory turnover ratios have decreased. The reason for this is revenue has increased by % whereas receivables have increased by % and Inventory by %.
Revenue increase is less than the increase in receivables and Inventory.Download