FINANCIAL RATIOS - The lower the number of days’ sales in

A. Liquidity ratios inventory, the better the inventory control

B. Borrowing capacity (leverage) ratios
C. Profitability ratios Ending Inventory
D. Special ratios C ost of Goods Sold /365
E. Cash Flow ratios
Accounts Receivable Turnover
ANALYSES - Indicates the liquidity of the receivables
Common-Size Analysis
- Expresses comparison in percentages Net Sales
- Makes comparisons of firms of different Average Gross Receivables
sizes
Accounts Receivable Turnover in Days
1. Vertical Analysis (use of same accounting Average Gross Receivables
period; base amount is selected)
Net Sales/365
2. Horizontal Analysis (use of same account;
base year is selected)
Inventory Turnover
Cost of Goods Sold
Cross-sectional Analysis
Average Inventory
Trend Analysis
- Studies the financial history of a firm for
comparison
- Helps detect problems or observe good
management

SOLVENCY
Quick ratio =
Current Assets
Current ratio =
Current Liabilities

PROFITABILITY
Return on Sales
Return on Assets
Return on Net Working Capital

Days’ Sales in Receivables

- A/R should include trade notes receivable
- Other receivables not related to sales on
account should NOT be included

Gross Receivables
Net Sales/ 365

Days’ Sales in Inventory

- All of the inventory accounts should be
included
- Estimates the number of days that it will
take to sell the current inventory