Question

Your grandma wants to know the definition of some financial ratios. Please explain to her (in simple terms) the below following ratios and why those are useful. (a) The inventory turnover. (b) The acid-test (or quick) ratio.

Answer 1

Part A:

Inventory Turnover Ratio = COGS / Inventory

It specifies How Many time the goods sold with respect to Avg Inventory.

Ex: Values are just for reference

Particulars	Amount
Cost of Goods Sold	$                      650,000.00
Avg Inventory	$                         45,000.00

Inventory Turnover Ratio = COGS / Inventory
= 650000 / 45000
= 14.4444
I.e 14.4444 Times

Part B:

Quick Ratio =[ Currenct Assets - Inventory ]/ Currenct Liabilities

Ex: Values are just for reference

Particulars	Amount
Current Assets	200000
Current Liabilities	100000
Inventory	30000

Quick Ratio =[ Currenct Assets - Inventory ]/ Currenct Liabilities
= [ 200000 - 30000 ] / 100000
= [ 170000 ] / 100000
= 1.7
I.e 1.7 Times