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Zea G.

Cronico

BSA IV

SUMMARY OF RATIOS: THEIR FORMULAS AND SIGNIFICANCE

I. Ratios Used To Evaluate Short-Term Financial Position


(Short-Term Solvency and Liquidity)
Name Formula Significance
Primary test of solvency to
meet current obligations
𝑇𝑜𝑡𝑎𝑙 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 from current assets as a
1. Current Ratio
𝑇𝑜𝑡𝑎𝑙 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 going concern;
Measure of adequacy of
working capital
2. Acid-test or Quick 𝑇𝑜𝑡𝑎𝑙 𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠 ∗ A more severe test of
Ratio 𝑇𝑜𝑡𝑎𝑙 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 immediate solvency;
*Cash + Marketable Test of ability to meet
Securities + Accounts demands from current
Receivable assets
3. Working Capital 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 Indicates relative
to total assets 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 liquidity of total assets
and distribution of
resources employed
4. Cash Flow Cash + Marketable Securities Measures short-term
Liquidity Ratio +Cash flow from Operating liquidity by considering
𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠
as cash resources
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
(numerator) cash plus
cash equivalents plus
cash flow from
operating activities
5. Defensive Interval 𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠 Measures length of time
Ration 𝑃𝑟𝑜𝑗𝑒𝑐𝑡𝑒𝑑 𝐷𝑎𝑖𝑙𝑦 in days a firm can
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 operate on its present
liquid resources

II. Ratios To Evaluate Asset Liquidity and Management Efficiency


1.
a. Trade
Receivable
Turnover