Liquidity Ratios

Question 1

What are the two formulas for working Capital (short and long run)?

Answer 1

SHORT-RUN:
Current Assets - Current Liabilities

LONG-RUN:
(Equity + Non-Current Liabilities) - Non Current Assets

Question 2

What does Working Capital Represents?

Answer 2

It’s an indication of short-run solvency of a firm and can be used both for short-term and long-term

Question 3

What is the formula for Current Ratio?

Answer 3

Current Liabilities

Question 4

What does Current Ratio Represents?

Answer 4

-Determined short-tem debt paying ability
-Focus on the relationship between current assets and current liabilities

Question 5

What are the desired values for the Current Ratio?

Answer 5

1.5 and 2

Question 6

What is the Formula for the Acid Test Ratio?

Answer 6

   Current Liabilities

Question 7

What does the Acid Test Ratio Represents?

Answer 7

-Measures immediate liquidity of the firm
-Relates the most liquid assets to current liabilities
-Minimum acid-test ratio is 1

Question 8

What is the formula for Cash Ratio?

Answer 8

      current liabilities

Question 9

What does the Cash Ratio Represents?

Answer 9

-an extremely immediate and conservative view of the liquidity of the company
-it is most of the times lower than one
-0.3 is considered to be a good measure