Page 684 - Accounting Principles (A Business Perspective)

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For 2010, Synotech has USD 298.0 million in cash and cash equivalents, USD 71.3 million in marketable
securities, USD 2,285.2 million in current liabilities, and USD 1,101.0 million in cash provided by operating
activities (taken from the statement of cash flows in its annual report). Its cash flow liquidity ratio is:

USD298.0USD 71.3USD1,101.0 =.64 time
USD2,285 :2
This indicates that the company is going to have to rely on some other sources of funding to pay its current
liabilities. The company's liquid current assets will only cover about two-thirds of the current liabilities. Possibly
net cash provided by operations will be substantially higher in 2011.

Accounts receivable turnover Turnover is the relationship between the amount of an asset and some
measure of its use. Accounts receivable turnover is the number of times per year that the average amount of
receivables is collected. To calculate this ratio, divide net credit sales (or net sales) by average net accounts
receivable; that is, accounts receivable after deducting the allowance for uncollectible accounts:
Net credit salesnetsales
Accounts receivableturnover=
Average net accountsreceivable
When a ratio compares an income statement item (like net credit sales) with a balance sheet item (like net
accounts receivable), the balance sheet item should be an average. Ideally, analysts calculate average net accounts
receivable by averaging the end-of-month balances or end-of-week balances of net accounts receivable outstanding
during the period. The greater the number of observations used, the more accurate the resulting average. Often,
analysts average only the beginning-of-year and end-of-year balances because this information is easily obtainable

Accounting Principles: A Business Perspective 685 A Global Text