Liquidity Ratios Flashcards
What are Liquidity ratios?
Help assess the cash flow position of the organisation and how they are managing their finances. Includes Current ratio and Acid test ratio(on ratio sheet)
Current ratio evaluation
Current ratio compares the current assets(easily turned into cash) to current liabilities(expected to be paid within the year), giving a current liquidity indication. Meet short term debt
The ideal figure would be between 1.5:1 and 2:1.
Should be compared to previous years and industry standards.
Acid test ratio evaluation
Acid test ratio does not class stock(inventory) as a current ratio, because if you want to sell stock quickly you would have to reduce the value of the asset. Meet short term debts from liquid assets
Seen as a better indication of a business’s liquidity.
Idea figures will be between 0.75:1 and 1:1
