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Money Bag

Unit 3 - Finance & accounts - QB

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Chart Increasing

Unit 1 - Introduction To Business Management - QB

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Briefcase

Unit 2 - Human Resource Management - QB

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Direct Hit

Unit 4 - Marketing - QB

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Factory

Unit 5 - Operations management - QB

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Bar-Chart

Unit 6 - Assessment

Imagine you&#39;re stranded on a deserted island with a mountain of candy bars (assets) and an upcoming bill from the &quot;Island Candy Bar Provider&quot; (liabilities). Liquidity ratios help you figure out if you can pay that bill using your candy bars without going hungry.

<ul>
	<li>Liquidity: How quickly assets can be turned into cash (or traded for those delicious candy bars).</li>
	<li>Liquid Assets: These are like the candy bars you can quickly munch on. Examples include cash, stock, and debtors.</li>
</ul>

<ul>
	<li>Current Ratio</li>
	<li>Acid Test (Quick) Ratio</li>
</ul>

<ul>
	<li>Formula: Current Assets &divide; Current Liabilities</li>
	<li>Real-world Example
	<ul>
		<li>Assets: $500,000 (total candy bars you have)</li>
		<li>Liabilities: $250,000 (candy bars you owe)</li>
		<li>Current Ratio = $500,000 &divide; $250,000 = 2 or 2:1</li>
		<li>This means for every candy bar you owe, you&#39;ve got 2 candy bars on hand. Sweet!</li>
	</ul>
	</li>
</ul>

<ul>
	<li>🟢 Green (1.5:1 to 2:1): Ideal. You have a good balance to pay off your debts.</li>
	<li>🔴 Red (below 1:1): Danger! More debts than assets.</li>
	<li>🟡 Yellow (very high): Watch out! Maybe too much cash, or too many people owe you, or you&rsquo;ve hoarded candy bars!</li>
</ul>

<ul>
	<li>Reduce short-term debts (like switching from a bank overdraft to long-term loans).</li>
	<li>Sell some non-essential items (like that extra hammock) for cash.</li>
</ul>

<ul>
	<li>This is like the Current Ratio but spicier! We ignore the candy bars that are hard to sell quickly (stocks).</li>
	<li>Formula: (Current Assets - Stock) &divide; Current Liabilities</li>
	<li>Real-world Example
	<ul>
		<li>Using our previous assets of $500,000 and removing the stock (worth $150,000)</li>
		<li>Acid Test Ratio = ($500,000 - $150,000) &divide; $250,000 = 1.4 or 1.4:1</li>
		<li>Meaning for every candy bar bill, you have 1.4 candy bars (minus the hard-to-sell ones).</li>
	</ul>
	</li>
</ul>

<ul>
	<li>🟢 Green (typically above 1:1): Good. You can pay off debts without relying on hard-to-sell assets.</li>
	<li>🔴 Red (below 1:1): Danger! Might struggle to pay short-term debts.</li>
	<li>🟡 Yellow (very high): Watch out! Like Current Ratio, but no stock considerations.</li>
</ul>

<ul>
	<li>Sell off hard-to-sell candy bars (stocks) at a discount.</li>
	<li>Give more time for people to pay you back (increased credit period) so they buy more. But, make sure they don&rsquo;t ghost you!</li>
</ul>

🌟 Remember: These ratios give a snapshot of a company&#39;s financial health. Like checking if a plant needs water, they tell us if a business can quench its debt thirst. But always look at the big picture! Different industries have different standards, like cacti and roses need different amounts of water. 🌵🌹

&nbsp;

Happy crunching! 📊🍫🎈

Unit 3 - Finance & accounts - QB

Mastering Liquidity Ratios: Current Vs. Acid Test Explained

Table of content

What are liquidity ratios? 🌊

Two main liquidity ratios to know 🔍

Current ratio 🍎

Traffic light guide to current ratio🚦

Unlock the Full Content!

Unit 3 - Finance & accounts - QB

Mastering Liquidity Ratios: Current Vs. Acid Test Explained

Table of content

What are liquidity ratios? 🌊

Two main liquidity ratios to know 🔍

Current ratio 🍎

Traffic light guide to current ratio🚦

Unlock the Full Content!