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Chapter 8

Illustrations and further practice

Now read Illustrations 2 and 3 from Chapter 8 of the Study Text

2.3 Measuring liquidity

 Liquidity needs to be considered alongside profitability.

 Need to ensure organisation can meet its short-term obligations.

Measures include:

 Current ratio = current assets ÷ current liabilities

 Acid test = (current assets – inventories) ÷ current liabilities

 Inventory period = (average inventory ÷ cost of sales) × 365

 Receivables period = (average receivables ÷ sales) × 365

 Payables period = (average payables ÷ purchases) × 365

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