The current ratio is a liquidity ratio that assesses the company’s operating efficiency. The current ratio is computed by dividing the company’s current assets by current liabilities to assess whether it has enough resources to meet its obligations even when faced with unexpected events. In business, if the company’s current assets compared to current liabilities are a ratio of 2.1 it is expected the company will …show more content…
The asset turnover ratio is computed by dividing net sales by the average total assets. Yellow Leaf Fashion Inc. determines their asset turnover by taking their net sales of $2,919,800 divided by their average total assets of $2,569,180 which determines their asset turnover is 1.1365. This indicates that for every dollar of assets Yellow Leaf Fashion Inc. has it generates a profit of an average of $1.14 for this period. In conclusion, Yellow Leaf Fashion Inc. efficiently manages their assets to create revenue higher than their …show more content…
Kieso, Jerry J. Weygandt and Terry D. Warfield, the authors explain the coverage ratio, “provides information on financial flexibility. It indicates a company’s ability to repay its liabilities from net cash provided by operating activities, without having to liquidate the assets employed in its operations” (2015, p.234). It is calculated by dividing net cash provided by operating activities with the company’s average total liabilities. Yellow Leaf Fashion Inc. calculated their cash debt coverage ratio by taking their net cash provided by operating activity, $626,762, and dividing it by the company’s average total liabilities, $545,803. The company’s cash debt coverage ratio is 1.1483. Thus Yellow Leaf Fashion Inc. will likely be able to survive and meet its current debt obligations by the company’s current operating activities even if external sources of funds become limited or too