Statement Analysis Tools and Accounting Ratios Test - 48

Low working capital turnover ratio indicates that the working capital of business is under-utilized. It means firm is investing in too many account receivable and inventory to support its sales.

Financial statement analysis is of two types i.e. External and internal analysis. External analysis is concerned with comparing business with other firm. Internal analysis undertaken by the mangement of the company to monitor its financial and operating performance.

Quick assets are the assets which can be converted into cash in a short term.

Accounting Ratios can be expressed as follows:

a) Simple or pure ratio

b) Percentages

c) Rate

Quick Ratio is also known as liquid ratio. Formula: Liquid Assets/ Current Liabilities

Quick assets do not include inventories. Stores and spares is the part of inventories. Only liquid assets are considered in quick assets and stores and spares are considered as illiquid.

Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings compared to its expenses and other relevant costs incurred during a specific period of time.

Inventory turnover ratio is calculated under the Activity Ratio.

i.e. Inventory Turnover Ratio = Cost of Revenue from operations or cost of goods sold/Average Inventory. Average inventory is used instead of ending inventory because many company's merchandise fluctuates greatly throughout the year.

Revenue from operations + Other income = Total Revenue. Revenue means amount collected by the business from its main operations.

Rent received is shown as other income and it is added to the revenue from operations to find out the total revenue.