MGT 6201 ACCOUNTING ANSWERS AND QUESTIONS
SET A+
✔✔Current Assets - ✔✔• those assets that a company expects to convert into cash
within the next year.
o Top of balance sheet
o Cash, inventory, A/R, short term investments
✔✔Current Liabilities - ✔✔• those liabilities that come due within the next year.
o Short term notes payable, Accounts Payable
✔✔Working Capital - ✔✔Current Assets - Current Liabilities
✔✔Current Ratio - ✔✔Current Assets/Current Liabilities
✔✔Quick Ratio - ✔✔(Cash + Marketable Securities + A/R) / Current Liabilities
✔✔What is a good current ratio? - ✔✔1
o A high ratio shows you aren't making great value on your assets
o Good to limit current assets, but still have enough to maintain safe liquidity
o Significantly below 1 means they may not be able to pay their bills
✔✔When is a quick ratio a better indicator of a successful business than its current
ratio? - ✔✔When inventory is propping up their current assets. If a company has a large
inventory but very little other current assets, they might be in trouble (Sears).
✔✔Solvency/Leverage Ratios - ✔✔What is the ability of the company to pay its long-
term obligations?
• Solvency refers to a company's ability to meet its debt obligations.
• Leverage describes how a company is financed.
✔✔Debt-to-Equity - ✔✔Total Liabilities / Shareholders' Equity
, • The more liabilities, the harder to pay back
o The higher this ratio, the harder it is to pay
✔✔Receivables Turnover Rate - ✔✔Sales Revenue / Avg Accounts Receivable
• The accounts receivable turnover rate reveals how many times receivables have
turned (been collected) during the period.
✔✔Average Collection Period - ✔✔365 / Receivables Turnover
• The average collection period reveals how many days on average it takes the
company to collect their A/R.
o This would be 0 if you don't extend credit to customers (only accept cash)
✔✔Inventory Turnover - ✔✔Cost of Goods Sold / Avg Inventory
• The inventory turnover ratio reveals how many times inventory turned (was sold)
during the period.
✔✔Average Days Inventory Held - ✔✔365 / Inventory Turnover
• The average days in inventory held reveals how many days on average it takes the
company to sell inventory.
✔✔Payables Turnover Ratio - ✔✔Cost of Goods Sold / Avg Accounts Payable
• The payables turnover ratio reveals how many times payables turned (were paid)
during the period.
✔✔Avg Days Payables - ✔✔365 / Payables Turnover
• The average days payable reveals how many days on average the firm waited to pay
their receivables.
✔✔Days in Financing (AKA Cash Conversion Cycle): - ✔✔Days in Financing = Days in
Inventory + Days in A/R - Days in Payables
• Amount of time they have to borrow money (likely from the bank)
✔✔Three ways to reduce days in financing - ✔✔1) reduce days in inventory
2) reduce days in accounts receivable
3 ) increase days in accounts payable
✔✔Common-size financial statements (Vertical analysis): - ✔✔express each item as a
percentage of a total amount (typically, total assets for balance sheet items and sales
for income statement items) within the same year.
SET A+
✔✔Current Assets - ✔✔• those assets that a company expects to convert into cash
within the next year.
o Top of balance sheet
o Cash, inventory, A/R, short term investments
✔✔Current Liabilities - ✔✔• those liabilities that come due within the next year.
o Short term notes payable, Accounts Payable
✔✔Working Capital - ✔✔Current Assets - Current Liabilities
✔✔Current Ratio - ✔✔Current Assets/Current Liabilities
✔✔Quick Ratio - ✔✔(Cash + Marketable Securities + A/R) / Current Liabilities
✔✔What is a good current ratio? - ✔✔1
o A high ratio shows you aren't making great value on your assets
o Good to limit current assets, but still have enough to maintain safe liquidity
o Significantly below 1 means they may not be able to pay their bills
✔✔When is a quick ratio a better indicator of a successful business than its current
ratio? - ✔✔When inventory is propping up their current assets. If a company has a large
inventory but very little other current assets, they might be in trouble (Sears).
✔✔Solvency/Leverage Ratios - ✔✔What is the ability of the company to pay its long-
term obligations?
• Solvency refers to a company's ability to meet its debt obligations.
• Leverage describes how a company is financed.
✔✔Debt-to-Equity - ✔✔Total Liabilities / Shareholders' Equity
, • The more liabilities, the harder to pay back
o The higher this ratio, the harder it is to pay
✔✔Receivables Turnover Rate - ✔✔Sales Revenue / Avg Accounts Receivable
• The accounts receivable turnover rate reveals how many times receivables have
turned (been collected) during the period.
✔✔Average Collection Period - ✔✔365 / Receivables Turnover
• The average collection period reveals how many days on average it takes the
company to collect their A/R.
o This would be 0 if you don't extend credit to customers (only accept cash)
✔✔Inventory Turnover - ✔✔Cost of Goods Sold / Avg Inventory
• The inventory turnover ratio reveals how many times inventory turned (was sold)
during the period.
✔✔Average Days Inventory Held - ✔✔365 / Inventory Turnover
• The average days in inventory held reveals how many days on average it takes the
company to sell inventory.
✔✔Payables Turnover Ratio - ✔✔Cost of Goods Sold / Avg Accounts Payable
• The payables turnover ratio reveals how many times payables turned (were paid)
during the period.
✔✔Avg Days Payables - ✔✔365 / Payables Turnover
• The average days payable reveals how many days on average the firm waited to pay
their receivables.
✔✔Days in Financing (AKA Cash Conversion Cycle): - ✔✔Days in Financing = Days in
Inventory + Days in A/R - Days in Payables
• Amount of time they have to borrow money (likely from the bank)
✔✔Three ways to reduce days in financing - ✔✔1) reduce days in inventory
2) reduce days in accounts receivable
3 ) increase days in accounts payable
✔✔Common-size financial statements (Vertical analysis): - ✔✔express each item as a
percentage of a total amount (typically, total assets for balance sheet items and sales
for income statement items) within the same year.
