Liquidity, Solvency, and Leverage Ratios - Liquidity
12 important questions on Liquidity, Solvency, and Leverage Ratios - Liquidity
What does Liquidity ratios do?
This contrasts with liquidity.
What does Net working capital report?
What is the formula?
Formula:
Current assets - Current liabilities
What are the Liquidity ratios you know?
How many? What are the distinguishing features?
For the CMA exam 5 ratios are relevant:
- Current ratio
- Quick ratio aka acid-test
- Cash ratio
- Cash flow ratio
- Net working capital ratio
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What is included in Current assets in descending order of liquidity?
- cash and equivalents
- marketable securities
- receivables net of allowance for credit losses
- inventories
- prepaid items
What is included in Current liabilities in descending order of liquidity?
- accounts payable
- notes payable
- current maturities of long-term debts
- unearned revenues
- taxes payable
- wages payable- other accruals
What is the formula of the Quick Ratio (aka acid-test)?
What does a high/low Quick Ratio (aka acid-test) indicate?
Quick Ratio (acid-test) = ---------------------------------------------------
Current Liabilities
- a ratio above 1 is desirable, which indicates a low risk of default,
- a high ratio indicates a low level of creditors risk,
- a very high ratio may indicate inefficient asset management
What is the formula of the Cash Ratio?
What does a high/low Cash Ratio indicate?
Cash Ratio = -----------------------------------------------
Current Liabilities
- a ratio above 1 is desirable, which indicates a low risk of default,
- a high ratio indicates a low level of creditors risk,
- a very high ratio may indicate inefficient asset management
What is the Liquidity of Current Liabilities?
Liquidity of Current Liabilities is the ease with which a firm can issue new debt or raise new structured (convertible, puttabel, callable, etc.) funds.
This ease is generally a function of a firm's:
- size
- reputation
- creditworthiness
- capital levels
What is the formula of the Cash Ratio?
What does a high/low Cash Ratio indicate?
Cash Ratio = -----------------------------------------------
Current Liabilities
- a ratio above 1 is desirable, which indicates a low risk of default,
- a high ratio indicates a low level of creditors risk,
- a very high ratio may indicate inefficient asset management
What is the formula of the Quick Ratio (aka acid-test)?
What does a high/low Quick Ratio (aka acid-test) indicate?
Quick Ratio (acid-test) = ---------------------------------------------------
Current Liabilities
- a ratio above 1 is desirable, which indicates a low risk of default,
- a high ratio indicates a low level of creditors risk,
- a very high ratio may indicate inefficient asset management
What is the formula of the Cash flow Ratio?
What does a high/low Cash flow Ratio indicate?
Cash flow Ratio = --------------------------------------
Current Liabilities
- a ratio above 1 is desirable, which indicates a low risk of default,
- a high ratio indicates a low level of creditors risk,
- a very high ratio may indicate inefficient asset management
What is the formula for the Net working capital Ratio?
What does a high/low Net working capital Ratio indicate?
NWC Ratio = -----------------------------------------------
Total Assets
- a ratio above 1 is desirable, which indicates a low risk of default,
- a high ratio indicates a low level of creditors risk,
- a very high ratio may indicate inefficient asset management
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