Liquidity Ratios

What type of solvency are liability ratios an indicator of?

Short term

When doing our financial analysis we will round to what?

to the nearest hundred

If the current ratio trend stays the same from one year to the next year it is referred to as

unchanged or stable

What do we round up to?

we round to the next highest number

What does it mean when the current ratio increases per year

what the historical trend is favorable

When do we round up

when the number in the thousandth place is 5 or higher

A current ratio that is greater than one means what?

A current ratio of 1.0 or greater is an indication that the company is well-positioned to cover its current or short-term liabilities.

What does a current ratio less than one mean?

A current ratio of less than 1.0 could be a sign of trouble if the company runs into financial difficulty

What type of assets and liabilities do Liquidity ratios focus on?

Current asset and current liability

What is the most common liquidity ratio?

Current ratio = current assets/current liabilities

What is the major method used to analyze financial statements and determine the financial condition of the company

Financial ratio analysis

Why are inventory and prepaids subtracted from the quick ratio?

Inventory is illiquid Prepaids are sometimes difficult to get back

Starbucks current ratio summary

Its current ratio was 1.05 times in 2016 and increased to 1.25 times in 2016. This means that in 2017 for every $1.00 in current liabilities, it had $1.25 in current assets to pay these liabilities. This shows that they are able to pay their short-term obligations when they come due. In addition, when comparing 2016 to 2017, the trend of the current ratio is favorable.

Starbucks quick ratio summary

Its quick ratio was 0.84 times in 2017 which was an increase from the 0.67 times in 2016. This means that in 2017 for every $1.00 in current liabilities, it had only $0.84 in quick assets to pay these liabilities. They do not have enough quick assets to repay their current liabilities if they had to pay them quickly in an emergency. However, the quick ratio trend is favorable. This shows that they are more able to quickly pay their short-term obligations when they come due in 2017 than in 2016.

What are pre-paid expenses?

Prepaid expenses are future expenses that have been paid in advance. You can think of prepaid expenses as costs that have been paid but have not yet been used up or have not yet expired.

What does the quick ratio indicate?

The companys ability to QUICKLY pay its short term obligations when they come due

What does a current ratio assume?

The current ratio inherently assumes that the company would or could liquidate all of most of its current assets and convert them to cash to cover these liabilities. In reality this is unlikely if the company is to remain as a going concern. A certain level of working capital will still be needed.

Which type of liquidity ratio is more conservative measure of liquidity?

The quick ratio

If the current ratio trend decreases from one year to another the trend is

The trend is unfavorable

When is a current ratio unchanged/stable?

When it stays the same year to year

When is a current ratio unfavorable?

When the current ratio decreases from one year to another

When is the quick ratio trend favorable?

When the quick ratio increases

When is the historical trend of the current ratio favorable?

When they current ratio increases

what are the most liquid assets of the company?

current assets- inventory- prepaid

Liquidity ratios

measure the companys ability to pay its short term obligations when they come due

Quick Ratio formula

quick ratio = (current assets - inventory-prepaids)/ current liabilities

What does the ratio tell us?

that it has X.XX times as much assets that will turn into cash within the year than the liabilities they must pay within the year

Fiscal Ratio Analysis

the major method used to analyze financial statements and determine the financial condition of the company

Type of liquidity ratios

1) current ratio 2) Quick ratio

What groups are typically grouped together in Financial ratios?

1) liquidity ratios (Short term solvency) 2) asset management or turnover ratios 3) financial leverage ratios (long-term solvency) 4) profitability ratios 5) Market value ratios

The amount of prepaid expenses that have not yet expired are reported on?

The amount of prepaid expenses that have not yet expired are reported on a company's balance sheet as an asset. As the amount expires, the asset is reduced and an expense is recorded for the amount of the reduction. Hence, the balance sheet reports the unexpired costs and the income statement reports the expired costs.

What is a quick ratio?

another liquidity ratio used in industries which accounts receivable are relatively liquid