Go Back   ManagementParadise.com | Management & Business Education Learning Platform PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT > Accounts

Introduction to Acid Test Ratio.

Discuss Introduction to Acid Test Ratio. within the Accounts forums, part of the PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT category; A measure of a company's ability to meet its short-term obligations using its most liquid assets. It is calculated by ...

Reply

 

Thread Tools Display Modes
Introduction to Acid Test Ratio.
Old
 (1 (permalink))
Tejas Gaikwad
tejas.gaikwad.1044 is an unknown quantity at this point
 
tejas.gaikwad.1044
Status: Offline
Posts: 37
Join Date: Aug 2013
Introduction to Acid Test Ratio. - August 7th, 2013

A measure of a company's ability to meet its short-term obligations using its most liquid assets. It is calculated by subtracting inventories from current assets and dividing the quantity by its current liabilities. A higher acid-test ratio indicates greater short-term financial health. The acid-test ratio is more conservative than the current ratio, which measures much the same thing, because the current ratio excludes the value of inventory. This is because inventory can be less liquid than other current assets. The acid-test ratio thus measures a company's ability to meet obligations in a worst-case scenario. It is also called the quick ratio.


A stringent test to determine whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory; the acid-test ratio is far more strenuous than the working capital ratio because the working capital ratio allows for the inclusion of inventory assets.


The acid test ratio, which is also known as the quick ratio, is a type a liquidity ratio that measures a company's ability to pay its short-term debts. It compares a company's most-liquid assets, or those that can be quickly converted into cash, to its short-term debts. The ratio equals the sum of a company's cash, short-term investments and accounts receivable divided by its current liabilities. The ratio excludes inventory from current assets, which is not as liquid as the other assets. A ratio greater than one means a company can pay its short-term debts. A ratio less than one means a company may have trouble paying its short-term bills.


How to Calculate Acid Test Ratio:-

1)Find cash, short-term investments and accounts receivable on a company's balance sheet listed in the "current assets" section.

2) Calculate the sum of these assets using the calculator. For example, add $1,000 plus $1,200 plus $2,000 for a company with $1,000 in cash, $1,200 in short-term investments and $2,000 in accounts receivable. This equals $4,200.

3) Use the calculator to divide $4,200 by the company's current liabilities, which is found in the "liabilities" section of the balance sheet. For example, a company with $3,500 in current liabilities has a quick ratio of 1.2: $4,200 divided by $3,500 equals 1.2. Since the ratio is greater than one, this company has enough current assets to meet its short-term financial obligations without relying on its inventory.



Example
:-

Assets Liabilities

Cash = 1000
Accounts payable = 500
Accounts receivable = 1000
Other short-term liabilities = 500
Inventory = 200
Current assets = 2200
Current Liabilities = 1000

Acid test ratio = (2200-200)/1000 = 2
Advertisements

Friends: (0)
Reply With Quote
Re: Introduction to Acid Test Ratio.
Old
 (2 (permalink))
Jitendra Mazee
jitendra05 is on a distinguished road
 
jitendra05
Student of Bachelor of Engineering at RGTU Bhopal
Bhopal, Madhya Pradesh
Management Paradise Guru
 
Institute: RGTU Bhopal
Status: Offline
Posts: 27,848
Join Date: Jan 2016
Location: Bhopal, Madhya Pradesh
Re: Introduction to Acid Test Ratio. - April 18th, 2016

Quote:
Originally Posted by tejas.gaikwad.1044 View Post
A measure of a company's ability to meet its short-term obligations using its most liquid assets. It is calculated by subtracting inventories from current assets and dividing the quantity by its current liabilities. A higher acid-test ratio indicates greater short-term financial health. The acid-test ratio is more conservative than the current ratio, which measures much the same thing, because the current ratio excludes the value of inventory. This is because inventory can be less liquid than other current assets. The acid-test ratio thus measures a company's ability to meet obligations in a worst-case scenario. It is also called the quick ratio.


A stringent test to determine whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory; the acid-test ratio is far more strenuous than the working capital ratio because the working capital ratio allows for the inclusion of inventory assets.


The acid test ratio, which is also known as the quick ratio, is a type a liquidity ratio that measures a company's ability to pay its short-term debts. It compares a company's most-liquid assets, or those that can be quickly converted into cash, to its short-term debts. The ratio equals the sum of a company's cash, short-term investments and accounts receivable divided by its current liabilities. The ratio excludes inventory from current assets, which is not as liquid as the other assets. A ratio greater than one means a company can pay its short-term debts. A ratio less than one means a company may have trouble paying its short-term bills.


How to Calculate Acid Test Ratio:-

1)Find cash, short-term investments and accounts receivable on a company's balance sheet listed in the "current assets" section.

2) Calculate the sum of these assets using the calculator. For example, add $1,000 plus $1,200 plus $2,000 for a company with $1,000 in cash, $1,200 in short-term investments and $2,000 in accounts receivable. This equals $4,200.

3) Use the calculator to divide $4,200 by the company's current liabilities, which is found in the "liabilities" section of the balance sheet. For example, a company with $3,500 in current liabilities has a quick ratio of 1.2: $4,200 divided by $3,500 equals 1.2. Since the ratio is greater than one, this company has enough current assets to meet its short-term financial obligations without relying on its inventory.



Example
:-

Assets Liabilities

Cash = 1000
Accounts payable = 500
Accounts receivable = 1000
Other short-term liabilities = 500
Inventory = 200
Current assets = 2200
Current Liabilities = 1000

Acid test ratio = (2200-200)/1000 = 2
Wow friend! You did a superb job and shared a very nice article which is explaining the concept of Acid Test Ratio in a very simple and easy way. Well, i have also got some important information on acid test ratio and would like to share it with you.
Attached Files
File Type: pdf Acid Test Ratio.pdf (345.8 KB, 0 views)
Friends: (0)
Reply With Quote
Reply

Bookmarks

Tags
acid, acid test ratio, introduction, ratio, test
Related to Introduction to Acid Test Ratio.
 

Similar Threads

Thread Thread Starter Forum Replies Last Post
Solutions Manuals, Instructor Manuals, Test Banks collection 2012 Soso M General Talks 22 May 15th, 2017 07:04 PM
 


Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is On
Trackbacks are On
Pingbacks are On
Refbacks are Off


ManagementParadise.com is not responsible for the views and opinion of the posters. The posters and only posters shall be liable for any copyright infringement.



Search Engine Optimization by vBSEO ©2011, Crawlability, Inc.