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Slimmu
Apr 10, 2008, 07:06 AM
Why current ratio is increasing while the acid ratio is decreasing

CaptainForest
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.