# Current ratio against acid ratio

Why current ratio is increasing while the acid ratio is decreasing

 CaptainForest Posts: 3,684, Reputation: 2085 Ultra Member #2 Apr 10, 2008, 07:14 PM
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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