please help

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:31AM in AAT student discussion
Please can any 1 explain what liquidity ratio, quick ratio or acid test ratio means please.
thanx kirsty

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:please help

    These ratios give some indication on how working capital is being managed.

    A liquidity ratio is current assets (stock, debtors, bank balance and cash) divided by current liabilities (mainly creditors, accruals, short-term leases, etc). A ratio of 2:1 is considered good, although it would really depend on the industry.

    A quick ratio or acid test is the same but with stock removed (the rational being that stock is not as liquid as the other assets).

    The major cause of business failure is lack of cash so these ratios are very commonly used.

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