RSM100Y1 Chapter Notes - Chapter Appendix: Gross Margin, Asset, Inventory Turnover
Document Summary
Current assets (minus inventory) divided by current liabilities. Cost of goods sold divided by average inventory. Revenue or sales divided by average total assets. Provides executives with information about the firm"s ability to pay its current debts as they mature, or as payments are due. In general, a current ratio of 2:1 is considered to provide satisfactory liquidity, to be considered along with other factors. Measures the ability of a firm to meet its debt payments on short notice. Quick assets generally consist of cash and equivalents, short-term investments, and accounts receivable. Quick assets equal to total current assets minus inventory. The traditional rule of thumb, or guideline, is 1:1. The ratio should be compared with industry averages and data from previous operating periods to decide whether it is adequate for the firm. Activity ratios: measure how effectively management uses the firm"s resources. One of the most frequently used activity ratios.
