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    Mrsingh

    What Does Current Ratio And Acid Test Suggest?

    If the current ratio for a business 4:1 but the acid test is 0.75:1, what does this suggest? Can anyone please explain? Please help.

    asked 6 months ago

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    Aicha

    The current ratio suggests that whether the company has enough financial resources to pay back its current debts possibly over the next financial year. A current ratio of 4:1 suggests that the company has $4 to pay for every $1 it owes in debt. Or the assets are 4 times the liabilities. On the other hand Acid test ratio or quick ratio measures the ability of the company to use its quick assets for paying back the current liabilities. A quick ratio of 0.75:1 shows that actually much of the current assets of this company constitute of inventories, salaries, supplies and prepayments. That is why it does not have enough cash to pay back its current debts.

    answered 6 months ago   

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