Liquidity

ratios

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Liquidity

Liquidity- refers to the ability of a company to pay its debt. Liquidity looks at this ability over a short term period. The ratios are; current ratio and acid test ratio.

 

Current ratio =

Current assets

Current liabilities

=0

=0:1 ratio means= to every £1 of liabilities, the company has (0) of assets

= The ideal result is 1.5:1 to 2:1

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Liquidity

Acid test ratio=

Current assets- stock

Current liabilities

=0

=0:1 ratio means= to every £1 of liabilities, the company has (0) of assets

= The ideal result is 0.75:1 to 1:1

 

The acid test is the only one to be used in the exam. Acid test is more accurate as stock cant always be seen as current, so acid test = a fairer comparison between different companies due to nature of stock

 

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