1. Compute the acid-test ratio and explain its use to assess liquidity. 2. Compute the gross margin ratio...

1. Compute the acid-test ratio and explain its use to assess liquidity.
2. Compute the gross margin ratio and explain its use to assess profitability.

Google one of your favorite companies and use their annual report to complete one of the following tests

Expert Solution

The ratios have been computed as per the company's 2017 annual report (i.e 2017 annual report of Alphabet Inc.)

1. Acid test ratio = (current assets - inventory)/current liability

= (124,308 - 749)/24,183

= 5.11

Acid test ratio is a stringent measure of liquidity and is based on those current assets that are highly liquid. Inventories are excluded from the numerator of this ratio as inventories are regarded as least liquid component of current assets.

This ratio helps us determine a firm’s ability to meet its obligations in the short run. The ratio for Google (Alphabet Inc.) is quite high.

2. Gross margin ratio = (revenue - cost of revenue)/revenue

= (110855-45583)/110855

= 58.88%

This ratio shows the margin left after meeting manufacturing costs (in case of manufacturing industries). In case of Google its cost of revenues consists of traffic acquisition costs and other costs incurred likewise.

Gross margin ratio measures the efficiency of the process as well as the pricing.

ekkarill92 answered 1 year ago

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