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    Slimmu's Avatar
    Slimmu Posts: 2, Reputation: 1
    New Member
     
    #1

    Apr 10, 2008, 07:06 AM
    Current ratio against acid ratio
    Why current ratio is increasing while the acid ratio is decreasing
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
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    #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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