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FINANCIAL MANAGEMENT 335 1. Current ratio. 2. Worth to debt. 3. Worth to fixed assets. 4. Merchandise to receivables. 5. Sales to receivables. 6. Sales to merchandise. 7. Sales to fixed assets. 8. Sales to net worth. Current Ratio. This ratio is secured by dividing the total of the current assets by the total of the current liabilities. The result indicates the dollars of current assets as offset for the dollars of current debt. The current assets will normally turn into cash or its equivalent in the near future, thereby putting the owner in possession of funds with which to pay debts. The current liabilities will mature in the near future, at which time the creditors will expect payment. From the liquidation of the current assets the current liabilities will be paid. The higher, therefore, the current ratio runs, the freer the current assets are from debt claim by creditors, and the more likely creditors are to receive prompt and complete payment upon demand. The Robert Morris Associates have found that it is simpler to express ratios in terms of percentages rather than as proportions; for example, instead of speaking of the current ratio as "two to one," greater accuracy and simplicity can be attained by expressing it as 200 per cent. In reading the current ratio, or any ratio, the analyst must remember that the ratio for any single statement is only a momentary pause in the movement for that company. The same identical current ratio figure for two separate companies may not represent the same credit condition at all. The value of the use of the current ratio lies in its record and direction of movement not in its onetime point of rest. The analyst must base his decisions not, therefore, on any one statement but on a study of the record of the company for at least three and if possible five years in order that the direction of the movement may be measured, as well as the single position. The socalled "acid test" is often used to supplement the current ratio. It is computed by dividing the total of cash and trade receivables by the total current liabilities. To meet the test satisfactorily the total of cash and trade receivables must equal the total current debt. Cash is, of course, immediately available for use in debt reduction. Receivables are only one step removed from cash and are subject to baddebt shrinkage only. Cash and receivables are, therefore, almost exactly opposite in character to debts which are maturing in the near future. The acid test is a drastic one. While it is not always easy to meet, it has the quality of conservatism. The analyst in applying this test must use discretion as in some lines the character of the industry may prevent the test from functioning fairly. Another ratio often used as a corollary to the current ratio is that of worMng capital to inventory. This ratio determines the sufficiency of the current ratio. Working capital is the excess of current assets over current liabilities. Inventory consists of raw material, goods in process, and finished goods. The ratio of working capital to inventory measures the amount of working capital tied up in inventory. If a company has a 200 per cent current ratio. 1
Beschrijving voorwerp
Titel  Handbook of business administration 
Jaartal  1931 
Collectienaam  NIVRA Historisch Archief, UBVU gedigitaliseerd 
PPN  344556336 
Toegangsgegevens (URL)  http://imagebase.ubvu.vu.nl/getobj.php?ppn=344556336 
Signatuur origineel  NIVRAHA151 
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Titel  NIVRAHA151_00389 
Transcript  FINANCIAL MANAGEMENT 335 1. Current ratio. 2. Worth to debt. 3. Worth to fixed assets. 4. Merchandise to receivables. 5. Sales to receivables. 6. Sales to merchandise. 7. Sales to fixed assets. 8. Sales to net worth. Current Ratio. This ratio is secured by dividing the total of the current assets by the total of the current liabilities. The result indicates the dollars of current assets as offset for the dollars of current debt. The current assets will normally turn into cash or its equivalent in the near future, thereby putting the owner in possession of funds with which to pay debts. The current liabilities will mature in the near future, at which time the creditors will expect payment. From the liquidation of the current assets the current liabilities will be paid. The higher, therefore, the current ratio runs, the freer the current assets are from debt claim by creditors, and the more likely creditors are to receive prompt and complete payment upon demand. The Robert Morris Associates have found that it is simpler to express ratios in terms of percentages rather than as proportions; for example, instead of speaking of the current ratio as "two to one," greater accuracy and simplicity can be attained by expressing it as 200 per cent. In reading the current ratio, or any ratio, the analyst must remember that the ratio for any single statement is only a momentary pause in the movement for that company. The same identical current ratio figure for two separate companies may not represent the same credit condition at all. The value of the use of the current ratio lies in its record and direction of movement not in its onetime point of rest. The analyst must base his decisions not, therefore, on any one statement but on a study of the record of the company for at least three and if possible five years in order that the direction of the movement may be measured, as well as the single position. The socalled "acid test" is often used to supplement the current ratio. It is computed by dividing the total of cash and trade receivables by the total current liabilities. To meet the test satisfactorily the total of cash and trade receivables must equal the total current debt. Cash is, of course, immediately available for use in debt reduction. Receivables are only one step removed from cash and are subject to baddebt shrinkage only. Cash and receivables are, therefore, almost exactly opposite in character to debts which are maturing in the near future. The acid test is a drastic one. While it is not always easy to meet, it has the quality of conservatism. The analyst in applying this test must use discretion as in some lines the character of the industry may prevent the test from functioning fairly. Another ratio often used as a corollary to the current ratio is that of worMng capital to inventory. This ratio determines the sufficiency of the current ratio. Working capital is the excess of current assets over current liabilities. Inventory consists of raw material, goods in process, and finished goods. The ratio of working capital to inventory measures the amount of working capital tied up in inventory. If a company has a 200 per cent current ratio. 1 
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