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Compute a few ratios and compare Reed's results with industry averages. (Some industry averages are given in Exhibit.) What do these ratios signify?

Reed's Clothiers Selected Ratios

Liquidity Ratios Industry
Current ratio 2.7
Quick ratio 1.6
Receivables turnover 7.7
Average collection period 47.4
   
Efficiency Ratios  
Total asset turnover 1.9
Inventory turnover 7.0
Payable turnover 15.1
   
Profitability Ratios  
Gross profit margin 33.0
Net profit margin 7.8
Return on common equity 25.9

As many ratios may have different meanings following definitions were used in above computations: Receivable turnover = sales/accounts receivable

Average collection period = 365/receivable turnover

Total asset turnover = cost of sales/total assets

Inventory turnover = cost of sales/inventories

Payable turnover = cost of sales/accounts payable

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M918142

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