Liquidity ratios Flashcards
1
Q
What is the objective of liquidiity ratios?
A
They refer to the company’s ability to pay off its short-term debts as/when they become due.
2
Q
What is the current ratio formula?
A
Current assets / current liabilities
3
Q
What is the acid test ratio formula?
A
(Current assets - inventory) / current liabilities
4
Q
Which ratio excludes inventory, and why?
A
The acid test ratio excludes inventory because it is not convertible to cash easily.
