F4 ratios: measuring liquidity Flashcards
current ratio=
current assets/current liabilities
what is an example of a favorable current ratio of a healthy business?
1.5:1
what does the current ratio show?
how many current assets the business has for every 1 liability
what is the current ratio also known as?
The working capital ratio
what current ratio would result in a business struggling to pay debt?
1:1
Liquid capital ratio=
current assets-inventory/current liabilities
what is the liquid capital ratio also know as?
the acid test ratio
what does the liquid capital ratio show?
The number of current assets the business has (excluding inventory) to the number of current liabilities.
why is inventory excluded from the liquid capital ratio?
it is the least liquid current asset as it takes time to sell and turn into cash to pay debts.
what is the ideal liquid capital ratio for a business?
1:1 , if a business has less than this it will have problems paying off its current liabilities
where would you find the information needed to calculate liquidity ratios?
Statement of financial position
who is interested in the liquidity of a business?
those who are providing short term credit to the company
why are liquidity ratios used?
to determine whether a business has enough current assets to pay of any debts that may need repaying
allows a business to measure how efficiently they can pay off its short term debts.
