Question

1. What is the significance of taking out inventory when using the quick ratio?
2. When I discussed leverage in my lecture I went over a few examples of when leverage caused a higher return and some where it caused a lower return. What was it that caused it to change from making money to losing money on an investment?
3. Why are the receivables, inventory and payable turnover ratios considered "asset management" or "efficiency" ratios?

Answer 1

1- quick ratio is calculated to find out the short term financial health of a firm to meet its liability without selling the inventories or fixed assets.it is equal to quick asset/current liability except for stock and prepaid expense. another reason for taking out sock is, it needs more time to convert it into cash. hence it is called the acid test ratio

2-Leverage or solvency is dealt with long term financial position and capital structure of a firm.here are may reason for losing money from an investment. the first and foremost thing is taking the wrong investment proposal. if it says so then it leads to higher debt and lowers the equity. there should be a balance between the owned capital and borrowed capital, otherwise, profit will be gone as interest payment for borrowed funds.

3- activity ratio shows how effectively a firm uses its available resources or assets.ie efficiency in asset management, it indicates the speed of resources converted to sales,high turnover ratio indicates high efficiency or better use of resourece