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Chapter 21

Liquidity

2.1 Current ratio: calculation

Current assets
——————

Current liabilities

2.2 Quick ratio (or acid test): calculation

Current assets (excluding inventory)

———————————————
Current liabilities

2.3 Current/quick ratio: reasons for movement

 increase/decrease in cash balance

 increase/decrease in inventory

 increase/decrease in receivables

 increase/decrease in payables

2.4 Inventory turnover: calculation

Cost of sales
————————
Inventory

 number of times inventory is turned over in the period

 higher turnover = higher efficiency

2.5 Inventory holding period: calculation

Inventory

———————— × 365 days
Cost of sales

 average number of days for which inventory held

 lower days = higher efficiency

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