Liquidity Flashcards
1
Q
What are the five terms that accounting ratios come under?
A
Profitability: How much wealth is created
Efficiency: How efficient is the use of resources
Short-term liquidity: are there enough liquid resources to meet maturing obligations?
Leverage: How much financing is contributed by creditors (i.e how much financial risk is there?)
Investment Return: How much do shareholders benefit?
2
Q
Current Ratio and Avid Test Ratio
A
Current Ratio = Current Assets/Current Liabilities
Acid Test Ratio = (Current assets - inventories)/Current liabilities
- > The higher the ratios the more liquid the business.
- > Acid test: inventories may not be turned into cash quickly
Ideally:
Current Ratio 2:1
Acid Test Ratio 1:1
-> But depends on type of business.
