IAS 1 Current and Quick Ratio

Question 1

What does current ratio consider?

Answer 1

How well can a business cover the current liabilities with its current assets

Question 2

Ideal current ratio?

Answer 2

It is between 1.5 and 2 to 1. This varies from industry to industry

Question 3

Current ratio in a service industry?

Answer 3

Slightly lower as there’s no to little inventory

Question 4

Why does quick ratio exclude inventory?

Answer 4

As it takes longer to turn into cash, it is not a quick asset

Question 5

How can an overdraft effect liquidity?

Answer 5

It is an expensive form of finance as it has high interest rates and is risky.

Issue if company is overdrawn

Question 6

Examples of companies that hold a lot of inventory?

Answer 6

Manufacturing companies

Question 7

Ideal quick ratio for companies with a slow inventory turnover?

Answer 7

At least one

Question 8

Ideal quick ratio for companies with a fast inventory turnover?

Answer 8

Can be faster than one without suggesting company could be in cash flow trouble

Question 9

Problem with a current and quick ratio that is too high?

Answer 9

Over-investing in working capital and tying up mroe funds than needed. Suggests poor management of receivables or inventory by company