Accounting

Accounting CURRENT RATIO The most common ratio using current-asset and current-liability data is the current ratio, which is current assets divided by current liabilities. Recall the makeup of current assets and current liabilities. Inventory is converted to receivables through sales, the receivables are collected in cash, and the cash is used to buy inventory and pay current liabilities. A company’s current assets and current liabilities represent the core of its day-to-day operations. The current ratio measures the company’s ability to pay current assets with current liabilities. Generally a higher current ratio indicates a stronger financial position. A higher current ratio suggests that the business has sufficient liquid assets to maintain normal business operations. ACID-TEST RATIO The acid-test (or quick) ratio tells us whether the entity could pay all its current liabilities if they came due immediately. ÷ That is, could the company pass this acid test' To do so, the company would have to convert its most liquid assets to cash. To compute the acid-test ratio, we add cash, short-term investments, and net current receivables (accounts and notes receivable, net of allowances) and divide by current liabilities. Inventory and prepaid expenses are the two current assets not included in the acid-test computations because they are the ratio, net, common, sales, current, income, return, inventory, assets, turnover, share, stock, per, debt, business, receivable, liabilities, interest, company’s, stockholders’, higher, equity, value, total, high, compute, average, year, receivables, rate, preferred, pay, measures, divide, cash, accounts, stockholders, market, indicates, earnings, during, company, amount, acid-test, stock’s, number, expense, dividends, times, sold