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Current ratio against acid ratio
Asked Apr 10, 2008, 07:06 AM
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1 Answer Why current ratio is increasing while the acid ratio is decreasing |
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| Current Ratio = Current Assets / Current Liabilities Acid Ratio = (Cash+ AR, etc.) / Current Liabilities Example: Year 1 Have 1,000 Current Liabilities Have 1,000 Cash Have 500 AR Have 500 Inventory Current Ratio = 2,000 / 1,000 = 2 Acid Ratio = 1,500 / 1,000 = 1.5 Year 2 Current Liabilities 1,000 Cash 500 AR 500 Inventory 1,500 Current Ratio = 2,500 / 1,000 = 2.5 Acid Ratio = 1000 / 1,000 = 1 Summary: Current Ratio goes up from 2 to 2.5 Acid Ratio goes down from 1.5 to 1 Current Assets such as inventory, go up (therefore, raising total Current Assets), but assets affecting quick ratio goes down. | ||||
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