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Balance Sheet Presentation & Ratio Analysis

Balance Sheet Presentation & Ratio Analysis. BALANCE SHEET PRESENTATION OF RECEIVABLES. In the balance sheet, short-term receivables are reported within the current assets section below cash and temporary investments.

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Balance Sheet Presentation & Ratio Analysis

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  1. Balance Sheet Presentation&Ratio Analysis

  2. BALANCE SHEET PRESENTATION OF RECEIVABLES • In the balance sheet, short-term receivables are reported within the current assetssection belowcash and temporary investments. • Both the gross amount of receivables and the allowance for doubtful accounts should be reported.

  3. MARK’S WORK WAREHOUSE LTD.Balance Sheet (partial)January 31, 2011(in thousands) ASSETS Current Assets Cash and cash equivalents $ 1,774 Accounts receivable (note 2) 15,010 Merchandise inventories 81,468 Other current assets 3,223 $101,475 Real World

  4. MARK’S WORK WAREHOUSE LTD.Notes to Financial StatementsJanuary 31, 2011(in thousands) NOTE 2 Accounts Receivable $16,010 Less: Allowance for Doubtful Accounts (1,000) Net Realizable Value $15,010 Real World

  5. MARK’S WORK WAREHOUSE LTD.Balance Sheet (partial)January 31, 2011(in thousands) ASSETS Current Assets Cash and cash equivalents $ 1,774 Accounts receivable $16,010 Less: Allowance for Doubtful Accounts 1,000 15,010 Merchandise inventories 81,468 Other current assets 3,223 $101,475 P

  6. USING THE INFORMATION IN THE FINANCIAL STATEMENTS • Financial ratios are calculated to evaluate the short-term liquidity of a company. • These ratios include the 1. current ratio, 2. acid test (quick) ratio, 3. receivables turnover ratio, and the 4. collection period ratio. • Who would care about these things?

  7. CURRENT ASSETS CURRENT RATIO = —————————— CURRENT LIABILITIES CURRENT RATIO • The current ratio (working capital ratio) is a widely used measure for evaluating a company’s liquidity and short-term debt-paying ability.

  8. CASH + TEMPORARY INVESTMENTS + RECEIVABLES (NET) ACID TEST RATIO = ———————————————————————————— CURRENT LIABILITIES ACID TEST RATIO • The acid test ratio (quick ratio) is a measure of a company’s short-term liquidity. Does not include Inventory

  9. ACCOUNTS RECEIVABLE TURNOVER RATIO • The ratio used to assess the liquidity of the receivables is the receivables turnover ratio. Net Credit Average Net Receivables Sales Receivables Turnover  =

  10. = Days in Year Receivables Collection (365) Turnover Period in Days COLLECTION PERIOD • The collection periodin days is a variant of the receivables turnover ratio and makes liquidity even more evident. • The general rule is that the collection period should not exceed the credit term period.

  11. BUSINESS CYCLE • The period of time that it takes to complete one business cycle INVENTORY  SALE  COLLECTION PURCHASE = DAYS SALES IN INVENTORY + COLLECTION PERIOD

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