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Liquidity Ratios<br />By Kohei Takata<br />Jun Yamada<br />Il Young Chun<br />Calvin Kim<br />
Liquidity Ratio<br />Assets -> cash <br />Quickly and no loss of value<br />reveals the level of liquidity<br />2 types- C...
Key Terms<br />Liquid assets (Current Assets)- Cash, Debtors, Stock<br />Short- term liabilities<br />Working Capital<br /...
Current Ratio<br />Liquid assets and short-term liabilities<br />Working capital<br />Formula<br />				Current Assets<br /...
Value/ Importance<br />Using liquid assets to cover short-term liabilities<br />Desirable ratio of 1.5-2.0 to 1<br />Safet...
Acid Test Ratio<br />Current assets and short- term liabilities (working capital)- stock<br />Formula<br />Current Assets-...
Value/ Importance<br />More meaningful than Current Ratio <br />At least 1:1<br />Important for potential investors and sh...
Limits of Liquidity Ratios<br />Ratios – (historical account of a firm’s performance)<br />Qualitative factors- ignored<br...
Example: Current Ratio<br />	Company A<br />Current Assets: 500,000<br />Stock: 200,000		Cash: 100,000		Debtors: 200,000<b...
Example: Acid Test Ratio<br />	Company A<br />Current Assets: 500,000<br />Stock: 200,000		Cash: 100,000		Debtors: 200,000...
Practice: Ho Gam Soft Drinks<br />
Works cited<br />Hoang, Paul. Business and Management. Victoria: IBID, 2007. Print.<br />BusinessDictionary.com - Online B...
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Liquidity Ratios Period 1 Kohei Takata

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Transcript of "Liquidity Ratios Period 1 Kohei Takata"

  1. 1. Liquidity Ratios<br />By Kohei Takata<br />Jun Yamada<br />Il Young Chun<br />Calvin Kim<br />
  2. 2. Liquidity Ratio<br />Assets -> cash <br />Quickly and no loss of value<br />reveals the level of liquidity<br />2 types- Current Ratio/ Acid Test Ratio<br />Comes from the Balance Sheet<br />
  3. 3. Key Terms<br />Liquid assets (Current Assets)- Cash, Debtors, Stock<br />Short- term liabilities<br />Working Capital<br />Opportunity Cost<br />Liquidity crisis<br />
  4. 4. Current Ratio<br />Liquid assets and short-term liabilities<br />Working capital<br />Formula<br /> Current Assets<br /> ____________<br /> Current Liabilities<br />
  5. 5. Value/ Importance<br />Using liquid assets to cover short-term liabilities<br />Desirable ratio of 1.5-2.0 to 1<br />Safety margin<br />Shows the liquidity position of the firm<br />Important for trade creditors<br />
  6. 6. Acid Test Ratio<br />Current assets and short- term liabilities (working capital)- stock<br />Formula<br />Current Assets- Stock<br />_________________<br />Current Liabilities<br />
  7. 7. Value/ Importance<br />More meaningful than Current Ratio <br />At least 1:1<br />Important for potential investors and short- term lenders (exposes the level of risk)<br />Can determine 2 things: <br />experiencing a liquidity crisis<br />holding too much current assets<br />
  8. 8. Limits of Liquidity Ratios<br />Ratios – (historical account of a firm’s performance)<br />Qualitative factors- ignored<br />Organizational objectives differ between businesses (misleading) Ex. Supermarkets and Jewelry shops<br />
  9. 9. Example: Current Ratio<br /> Company A<br />Current Assets: 500,000<br />Stock: 200,000 Cash: 100,000 Debtors: 200,000<br />Current Liabilities: 350,000<br />500,000<br />_________<br />350,000<br />Current Ratio- 1.43:1<br />Meaning: For every $1 of current liabilities, the firm has $1.43 of current assets<br />
  10. 10. Example: Acid Test Ratio<br /> Company A<br />Current Assets: 500,000<br />Stock: 200,000 Cash: 100,000 Debtors: 200,000<br />Current Liabilities: 350,000<br />(500,000- 200,000)= 300,000<br />_______________<br />350,000<br />Acid Test Ratio- 1:1.12<br />Meaning: For every $1.12 of current liabilities, the firm has $1 of (current assets- stocks) = Possible that the firm is experiencing a LIQUIDITY CRISIS!! <br />
  11. 11. Practice: Ho Gam Soft Drinks<br />
  12. 12. Works cited<br />Hoang, Paul. Business and Management. Victoria: IBID, 2007. Print.<br />BusinessDictionary.com - Online Business Dictionary. Web. 11 Nov. 2009.&lt;http://www.businessdictionary.com/&gt;.<br />Digital image. BNET. 25 May 2009. Web. 15 Nov. 2009. &lt;http://i.bnet.com/blogs/credit_cards.jpg&gt;. <br />Digital image. Naq Computer Systems. Web. 15 Nov. 2009. &lt;http://www.naqcomputers.com/sales/inventory_large.jpg&gt;. <br />Digital image. World Press. Web. 15 Nov. 2009. &lt;http://jshurwitz.files.wordpress.com/2009/10/cash-wad.jpg&gt;.<br />
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