Answer to Question #243345 in Accounting for Kiks

Question

What is the different types and formulas for Liquidity ratios? (30 marks)

Answer 1

Liquidity ratios measure the company's ability to pay off its obligations when they fall due without raising external capital.

There are various liquidity ratios such as;

Current ratio - measures the company's ability to pay off its current liabilities using its current assets.

Current ratio= Current Assets/Current Liabilities

Quick ratio - measures the company's ability to pay off its current liabilities using its most liquid current assets minus inventories. It's a more efficient measure than the current ratio.

Quick ratio= (Current Assets - Inventories)/Current Liabilities.

Working capital - indicates the liquidity levels of companies for managing day-to-day expenses and covers inventory, cash, accounts payable, accounts receivable, and short-term debt that is due.

Working Capital= Current Assets- Current Liabilities.

Days sales outstanding (DSO)- measures the average number of days it takes a company to collect payment after it makes a sale.

DSO= Average accounts receivable/Revenue per day