Acid-test ratio: Difference between revisions
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Acid-test ratios are a quick indicator of a company's ability to survive and a function of how quickly it can produce cash under pressure. The current ratio is a different ratio that assesses the liquidity of an [[organization]]. However, regardless of duration or maturity date, it considers all '''current assets''' and liabilities. As a result, it is not a particularly useful statistic for determining whether the business can survive if and when its creditors make a claim. The quick ratio sets a deadline and limits the amount of assets that can be considered in calculations. | Acid-test ratios are a quick indicator of a company's ability to survive and a function of how quickly it can produce cash under pressure. The current ratio is a different ratio that assesses the liquidity of an [[organization]]. However, regardless of duration or maturity date, it considers all '''current assets''' and liabilities. As a result, it is not a particularly useful statistic for determining whether the business can survive if and when its creditors make a claim. The quick ratio sets a deadline and limits the amount of assets that can be considered in calculations. | ||
'''Improvements''' Companies might take action to raise their asset count or decrease their liabilities in order to improve their fast ratios. For instance, they could relocate inventory to decrease the effect it has on the ratio as a whole. Another tactic is to invoice pending orders and goods so that they can be added to current assets as accounts receivables in accounting books. In a similar vein, firm expenditures that may have increased liabilities and '''account payable''' numbers can be postponed to the following quarter or fiscal year to improve quick ratios | '''Improvements''' Companies might take action to raise their asset count or decrease their liabilities in order to improve their fast ratios. For instance, they could relocate inventory to decrease the effect it has on the ratio as a whole. Another tactic is to invoice pending orders and goods so that they can be added to current assets as accounts receivables in accounting books. In a similar vein, firm expenditures that may have increased liabilities and '''account payable''' numbers can be postponed to the following quarter or fiscal year to improve quick ratios<ref>[[https://www.atlantis-press.com/proceedings/icaat-16/25864729] financial statement analysis: the case of Estonia.</ref> | ||
== References == | == References == | ||
Revision as of 14:56, 7 November 2022
The Acid test - ratio or Quick ratio also called the acid test ratio, compares current assets and current liabilities similarly to the current ratio. The quick ratio removes inventory because it is typically the least liquid asset for a corporation and losses typically arise when selling such assets, which is the primary distinction between these two ratios. Short-term prepayments made by the business are also not included in this computation. Given that inventory have been removed from this calculation because they may not be immediately realizable, the quick ratio measures the company's liquidity more strictly than the current ratio. The quick ratio calculates how much current assets are compared to current liabilities. We can argue that the liquidity is good if the current assets can meet the current liabilities. The more crucial liquidity a company has, the lower its current assets to current liabilities ratio.
Quick ratio
Quick ratio = (Current Assets – Inventory)/Current Liabilities.
- Quick assets refer to current assets less inventory & prepaid expenses.
- Current assets refer to cash and cash equivalents, Marketable securities and accounts receivable.
- Current liabilities refer to Accounts payable, short term debts and other short-term liabilitiesCite error: Closing
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References
- Alver,J.(2015). [[1] financial statement analysis: the case of Estonia.
- Horngren,C.T.,Harrison Jr,W.T.,Oliver, M.S.,(2012) [[2] Accounting.7th ed.New Jersey:Pearson Prentice Hall.
- The Institute of Chartered Accountant of India(ICAI).,(2021)[[3] Chapter-3:Financial Analysis and Planning-Ratio Analysis
Author: Billa Nalini
