Liquidity Flashcards
What are the liquidity ratios
The current ratio and the quick ratio
What does the current ratio compare
The current assets of the business to its current liabilities
How is the current ratio express d
As a ratio x : 1
How is the current ratio calculated
As current assets / current liabilties
What does a higher current ratio mean
The higher the ratio the more liquid the business is
What should the current ratio be
Neither too high or too low for my
If the current ratio is too high…
It means excess funds tied up in liquid assets which could be used elsewhere
If the current ratio is too low….
The business will be unable to meet debts as they fall due
What does the ideal current ratio depend on
The type of business
What else is the quick ratio known as
The Acid Test Ratio
How does the quick ratio compare to the current ratio
It is a more exact test of liquidity than the current ratio
What does the quick ratio exclude
It excludes inventories as they cannot be turned into cash quickly
How is the quick ratio expressed
As a ratio of x : 1
How is the quick ratio calculated
As current assets (excluding inventories)/ current liabilities
If the quick ratio is higher…
The business is more liquid
