Question

4. Define, indicate the use of, and the formula for computing the following: Acid-test (Quick) Ratio a. b. Accounts Receivable Turnover Ratio Days Sales in Receivables c.

Answer 1

Ans. 4 a	Acid - test (quick) ratio : Quick ratio is the measure of the instant debt paying ability of the business
	enterprise. It is also known as liquidity ratio. The liquidity ratio is an indication of a firm's ability to
	meet unexpected demand for working capital.
	Acid test ratio   =   (Total current assets - Inventory) / Total current liabilities
Ans. 4 b	Accounts receivable turnover ratio : If a firm is not able to collect its receivables within a reasonable time,
	its funds are unnecessarily tied up in trade receivables. Therefore, to know, how far the firm is successful in
	realising the credit, 'Accounts receivables turnover ratio' is calculated.
	This ratio indicates the number of times the trade receivables are turned over in a year in relation to sales.
	Accounts receivable turnover = Net credit sales / Average receivables
	*Average receivable = (Beginning accounts and notes receivables + Ending accounts and notes receivables) / 2
Ans. 4 c	Days sales in receivables : Average collection period or days sales in receivables means the number of days over
	which trade receivables remain uncollected. It indicates the rapidity or slowness in the collection process.
	Days sales in receivables = No. of days in year / Accounts receivable turnover ratio