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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Describe the circumstances under which the current, quick, and cash ratios, respectively, are more appropriate measures of short-term liquidity than the other ratios.

To determine

Concept introduction:

Liabilities:

Current Ratio:

Current Ratio is measure of the company’s ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities. The formula of the current ratio is as follows:

Current Ratio=Current assetsCurrent liabilities

Acid test ratio:

Acid test ration is also called Quick ratio. This ratio is calculated by dividing the quick assets (Cash, Cash equivalents, Short term investments and current receivables) by total current liabilities for the year. The formula for Acid test ratio is as follows:

Acid test ratio = (Cash + Cash equivalents + Short term investments + Accounts receivables) Current Liabilities

Cash ratio:

Cash ratio is calculated by dividing and cash and cash equivalents by the total current liabilities. The formula for Cash ratio is as follows:

Cash Ratio = Cash and cash equivalents/ Current liabilities

To indicate:

The situation in which current, quick and cash ratios are the most appropriate measures of the liquidity.

Explanation

Current Ratio is measure of the company’s ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities.

Quick ratio or Acid test ratio is also called Quick ratio...

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