Business Calculations 3
Business: Edexcel IGCSE, topic 3.5.5
Current Ratio
The current ratio measures the current assets against the current liabilities of a business.
Current ratio
- Current ratio = Current assets ÷ Current liabilities
Purpose of current ratio
- This is an indicator of liquidity. It measures whether a business has enough cash (or other current assets) to pay for any debts.
Acid Test Ratio
The acid test ratio is an adjustment of the current ratio. It removes inventories from the equation.
Acid test ratio
- Acid test ratio = (Current assets − inventory) ÷ Current liabilities
Purpose of the acid test ratio
- As the acid test ratio excludes inventories, it is particularly useful for businesses with a large number of stocks in the business' working capital. The inventories are typically the most illiquid element of current assets, so they are not counted as assets.
Test yourself on Business Calculations 3
A shoe shop's current assets total to £195,000. Its current liabilities are £200,000. What is its current ratio?
A shortbread business has current assets which equal £730,000. Its current liabilities are £600,000. What is its current ratio (to 2 decimal place)?
An opticians' current assets are £90,000. Its inventory is £30,000. Its current liabilities are £45,000. What is the acid test ratio (to 2 decimal places)?
A boutique jewellery shop has £200,000 in current assets, £150,000 in inventory and £100,000 in current liabilities. What is its acid test ratio?