This illustrated glossary uses Visual Finance™ to provide a contextualized 'big picture' view of financial results. The examples feature data for the Round Number Company—a 'made-up company' with simplified figures. The Appendix presents an explanation of how to read Visual Finance as well as the financial statements and VF views for the Round Number Company.
Accounts Receivable is money your customers owe to you. It is part of Current Assets.
The Days Sales Outstanding ratio shows how quickly Receivables (i.e. the proceeds from Sales) are converted into Cash. It is the average number of days to receive payment, this is automatically shown on the Visual Finance graphic.
Days Sales Outstanding (DSO) = Accounts Receivable (A/R) /Average Daily Sales
where Average Daily Sales = Sales/365
Example: The Round Number CompanySales = 200; Accounts Receivable = 40 Average Daily Sales = 200/365 = 0.548 Days Sales Outstanding (DSO) = 40/0.548 = 73 Days |
Accounts Receivable is aso called Receivables. Often called Debtors outside North America.
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Calculator for Days Sales Outstanding (DSO) Average Daily Sales = Sales/365 Days Sales Outstanding (DSO) = Receivables/Average Daily Sales |
ATR = Quick Assets/Current Liabilities
where Quick Assets = Cash + Receivables + Short-Term Investments
Example: The Round Number CompanyCash = 20; Accounts Receivable = 40; [STI} = 6; Current Liabilities = 36 Quick Assets = 20 + 40 + 6 = 66 ZATR = 66/36 = 1.8 |
The Acid-Test Ratio is a variant of the Current Ratio; it only includes items which are quickly (and easily) converted into cash. It is called ‘Acid-Test’ because it measures the ability to meet unexpected demands without depending on the sale of inventory.
A ratio of 1 is a good benchmark. Higher ratios indicate a satisfactory condition. Decreasing ratios indicate either a deteriorating cash position or a deteriorating demand for products.
Another definition of Quick Assets is: Current Assets less Inventories. This definition includes Prepaid Expenses but they are not always quickly converted to Cash.
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Calculator for ATR Quick Assets = Cash + Receivables + Short-Term Investments
Quick Ratio = Quick Assets/Current Liabilities |
The above is our generic explanations of common corporate financial terminology. Actual meanings can vary widely from company to company; in order to have the correct internal definition you need to ask your Finance Department, "What do you mean by that?"
term list.