A.

Liquidity Ratios

Liquidity:  is the ability to convert assets into cash quickly and cheaply.

Liquidity ratios are an important class of financial metrics used to determine a debtor's ability to
pay off current debt obligations without raising external capital. 

- Current liabilities are analyzed in relation to liquid assets to evaluate the coverage of short-term
debts in an emergency.

Common Liquidity Ratios

1. The Current Ratio: measures a company's ability to pay off its current liabilities (payable
within one year) with its current assets

2. The Quick Ratio "acid-test": measures a company's ability to meet its short-term obligations
with its most liquid assets and therefore excludes inventories and prepaid expenses from its
current assets.

B. ACTIVITY Ratios (commonly known as efficiency ratios):

- Measure the speed with which various accounts are converted into sales, cash , inflow or
outflow.

- Activity ratio formulas also help analysts to analyze the business’s current or short term
performance.

- an improvement in the ratios depicts improved profitability.

Most common types of Activity Ratios:

1. Inventory Turnover Ratio.

2. Accounts Receivable Turnover Ratio.
3. Account payable turnover ratio.
4. Total Assets Turnover Ratio.

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 1. Inventory turnover: dictates how fast a company replaces a current batch of
inventories and transforms the inventories into sales.

Days Inventory Outstanding: refers to the financial ratio that calculates the average
numbers of days of inventory that is been held by the company before selling it to the
customers.

Days Sales of Inventory Formula = 365/ inventory turnover

Or

Average Inventory* 365 / Cost of Sales

2. Accounts Receivable Turnover Ratio 

an efficiency ratio which indicates how times a company is able to collect its average receivables in
a given period

Average Collection Period

The time between the credit sales are made and the cash is paid

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 3. accounts payable turnover ratio:
indicates how many times a company can pay off its average accounts payable balance during the
course of a year.

Days payable outstanding: measures the time a business takes to pay off its creditors

4. Total Assets Turnover Ratio: measures a company’s ability to generate sales from its
assets.