is therefore, deducted from the CA. Similarly, short term bank borrowings though legally payable on demand, are generally renewed if the company is doing alright and hence is treated as long term liability. The acid test ratio will indicate whether liquid current assets are adequate to meet current liabilities. Here again, the duration of the operation cycle is a crucial factor to examine the magnitude of the standard ratio which is 1:1.
Activity Ratios: 1) Inventory Turnover Ratio = cost of goods sold/ Average inventory Inventory comprises of raw material, work-in-progress, finished goods and consumable stores and packaging materials. Inventory turnover ratio indicates how fast production cycle operates. If the ratio is high, it indicates higher volume of sales per rupee invested in inventory. If for example, this ratio is going down, it means that the company’s production operation is being lengthened and inventory is getting accumulate. In such a situation, it is necessary to examine the portfolio further. If there is accumulation of finished goods, it required a careful analysis of the reasons for this build up. It may be the result of a decline in the demand for the product of the firm resulting from price, competition, availability of substitute or changes in tastes, fashions, etc. the situation may not be so alarming if it is arising from the buildup of raw materials inventory unless it is obsolete. Inventory buildup entails several costs-interested, rent, insurance, salaries and loss due to obsolescence and pilferage. All these costs can be avoided if there is no inventory. However, business cannot run without a minimum of inventory. To ensure uninterrupted production and sales, a reasonable amount of inventory has to be maintained. The inventory turnover further is sub-divided into the three following categories with a different pattern. APOORVA GHOSH 4108024024 MBF 2008-2010
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