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    Liquidity Ratio 1

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    Wynphap podiotan
    This document discusses liquidity ratios, which measure a company's ability to meet short-term obligations. It defines two key liquidity ratios: 1. The current ratio, which measures a company's ability to pay short-term debts with its current assets. It is calculated as current assets divided by current liabilities. 2. The quick ratio, also called the acid test ratio, which measures a company's ability to pay debts with its most liquid current assets. It is calculated as cash + marketable securities + accounts receivable divided by current liabilities. The document then provides an example calculation of the current and quick ratios for a sample company using data from its statement of financial position. It asks reflection

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    Liquidity Ratio 1

    Uploaded by

    Wynphap podiotan
    567 views21 pages
    This document discusses liquidity ratios, which measure a company's ability to meet short-term obligations. It defines two key liquidity ratios: 1. The current ratio, which measures a company's ability to pay short-term debts with its current assets. It is calculated as current assets divided by current liabilities. 2. The quick ratio, also called the acid test ratio, which measures a company's ability to pay debts with its most liquid current assets. It is calculated as cash + marketable securities + accounts receivable divided by current liabilities. The document then provides an example calculation of the current and quick ratios for a sample company using data from its statement of financial position. It asks reflection

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    Liquidity of a business.

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    Liquidity-ratio-1

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    This document discusses liquidity ratios, which measure a company's ability to meet short-term obligations. It defines two key liquidity ratios: 1. The current ratio, which measures a company's ability to pay short-term debts with its current assets. It is calculated as current assets divided by current liabilities. 2. The quick ratio, also called the acid test ratio, which measures a company's ability to pay debts with its most liquid current assets. It is calculated as cash + marketable securities + accounts receivable divided by current liabilities. The document then provides an example calculation of the current and quick ratios for a sample company using data from its statement of financial position. It asks reflection

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    567 views21 pages

    Liquidity Ratio 1

    Uploaded by

    Wynphap podiotan
    This document discusses liquidity ratios, which measure a company's ability to meet short-term obligations. It defines two key liquidity ratios: 1. The current ratio, which measures a company's ability to pay short-term debts with its current assets. It is calculated as current assets divided by current liabilities. 2. The quick ratio, also called the acid test ratio, which measures a company's ability to pay debts with its most liquid current assets. It is calculated as cash + marketable securities + accounts receivable divided by current liabilities. The document then provides an example calculation of the current and quick ratios for a sample company using data from its statement of financial position. It asks reflection

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 21

    LIQUIDITY

    RATIO
    • Have you tried buying from sari-sari
    stores on credit?

    • What the implications are if you or your


    household don’t pay your obligations to
    your neighbor’s sari-sari store.
     
    • If a business does not pay its obligations
    on time, will it also have the same
    experiences like the household not
    paying its obligations? What could
    possibly happen to the business? Short-
    run? Long-run?
    Four main categories of financial
    ratios:

    • Liquidity
     
    • Profitability
     
    • Efficiency
     
    • Leverage
     
    Liquidity

    • refers to the company’s


    ability to satisfy its
    short-term obligations
    as they come due.
    Types of Liquidity Ratios

    1.Current Ratio
    - It measures the ability of the
    business to pay its short-term
    obligations as they fall due.

    Current ratio = Current Assets

    Current Liabilities
    2. Quick Ratio
    - Also known as acid test ratio
    measures immediate liquidity with
    the ability to pay current liabilities
    with the most liquid assets.

    Quick Ratio = Cash + Marketable securities + A/R


    Current Liabilities
     Note: that accounts receivable can have a non-
    current portion. Make sure it is removed from
    the current portion in computing the liquidity
    ratios.
     Marketable securities are short-term
    investments. Add that for receivables to be
    considered current, they should be collected
    within a year.
     The property developers can be examples of
    companies which can have accounts receivable-
    trade beyond one year.
    Company Statement of Financial Position
    as of December 31, 2014
    Assets   Liabilities and Stockholders’ Equity
    Cash P 120,000.00 Accounts Payable P 70,000.00
    Marketable Securities P 35,000.00 Short-term notes P 55,000.00
           
    Accounts receivable P 45,000.00 Current liabilities P 125,000.00
    Inventories P 130,000.00 Long-term debt P 2,700,000.00
           
    Current assets P 330,000.00 Total liabilities P 2,825,000.00
    Equipment P 2,970,000.00 Common stock P 500,000.00
    Buildings P 1,600,000.00 Retained earnings P 1,575,000.00
    Fixed Assets P 4,570,000.00 Stockholders’ equity P 2,075,000.00
           
    Total liabilities and
    Total Assets P 4,900,000.00 equity P 4,900,000.00
    What is the current ratio?

    2.64

    What is the quick ratio ?

    1.60
    Compute the following
    1. Current assets is PHP2,000, current liabilities is
    PHP3,500. What is current ratio?
     
    2. Inventory is PHP150. Accounts payable is PHP450. Cash
    and accounts receivable total PHP800. What is the current
    ratio? Quick ratio?
     
    3. If current ratio is 1.7, what is the total accounts receivable
    if cash is PHP20,000, inventory is PHP7,500, and accounts
    payable is PHP30,000.
     
    ANSWERS:
    1. Current ratio: 2,000/3,500 = 0.57

    2. Current ratio: (800 + 150)/450 = 2.11


    Quick ratio: 800/450 = 1.78

    3. Total receivables: 1.7= (X+20,000+7500)/


    30,000
    30,000x1.7=27,500x
    51,000=27,500x
    X=23,500
    Reflection questions:
    1. What is a good current ratio? 1? 2?
    0.5?
    2. Can a current ratio be lower than
    the quick ratio?
    3. Is a high current ratio always good?
    Is a low current ratio always bad?
    4. What factors affect company’s
    decisions in managing current ratio?
    5. If company A has current ratio of 1.3
    while company B has a current ratio of
    2.3, which is a better company
    • A high current ratio is not necessarily good. Although a
    high current ratio would mean that there is a higher
    probability that the company can meet its short-term
    obligations, its assets may not be earning as much and
    the company may have given up long-term investment
    opportunities.
     
    • High receivable balances increase liquidity ratios
    however, the collectability of these receivables might
    not be assured. Quality of receivables should also be
    considered in analyzing liquidity.
    • This can be explained in the discussion of efficiency
    ratios where the average collection period is computed.
    Compute the ratios of the sample
    companies and compare the three
    companies using the ratios computed.
    What are the possible reason why the
    sample companies have different
    ratios. What could have possibly
    caused these differences? What are
    the implications?
    Liquidity Ratios of the sample companies
      JFC Petron Globe
           
    Current
    Ratio 1.26 1.08 0.77
           
    Quick
    Ratio 0.80 0.54 0.67
    Jollibee Foods Corporation (JFC) – JFC has a
    relatively high current and quick ratio.
    This is driven by its high cash and receivable
    balances. With its mass market operations and
    expansion plans, high liquidity ratios make sense.
    It can also be attributed to relatively low levels of
    current liabilities.
    This can be explained later on when efficiency
    ratios are computed and when operating cycle
    and cash conversion cycles are computed.
    These cycles will also show later on why JFC’s
    operating cash flows are high and which allows
    the company to pay its maturing obligations on
    time.
    Petron Corporation - As an established company
    operating in a stable oil industry, Petron’s
    liquidity ratios can be acceptable.
    What made Petron’s liquidity ratios low is the
    PHP133 billion short-term debt. If this is taken
    out, Petron’s liquidity ratios will be much higher.
    But this is a decision made by the management
    of the company.

    Later in the course when working capital


    financing policies are discussed, this is an
    indicator that the company has adopted a more
    aggressive working capital financing policy.
    Globe Corporation – Globe’s liquidity ratios are
    relatively low compared to the other two
    companies.
    This means that Globe might need to get more
    financing to meet its short-term obligations.
    However, since Globe is an established company,
    it won’t be difficult for it to get more credit from
    the bank or funding from investors.

    There are other financial ratios that need to be


    considered in determining the credit worthiness
    of Globe, not just liquidity ratios.
    Let’s have a quiz
    

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