Business Management SL
6
Chapters
175
Notes
Unit 1 - Introduction To Business Management
Unit 2 - Human Resource Management
Unit 3 - Finance & accounts
Unit 4 - Marketing
Unit 5 - Operations management
Unit 6 - Assessment
Business Management SL

# Mastering Liquidity Ratios: Current Vs. Acid Test Explained

669 words
4 mins read
Last edited onย 14th Jun 2024

## What are liquidity ratios? ๐

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

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

## Two main liquidity ratios to know ๐

• Current Ratio
• Acid Test (Quick) Ratio

## Current ratio ๐

• Formula: Current Assets ÷ Current Liabilities
• Real-world Example
• Assets: \$500,000 (total candy bars you have)
• Liabilities: \$250,000 (candy bars you owe)
• Current Ratio = \$500,000 ÷ \$250,000 = 2 or 2:1
• This means for every candy bar you owe, you've got 2 candy bars on hand. Sweet!

## Traffic light guide to current ratio๐ฆ

• ๐ข Green (1.5:1 to 2:1): Ideal. You have a good balance to pay off your debts.
• ๐ด Red (below 1:1): Danger! More debts than assets.
• ๐ก Yellow (very high): Watch out! Maybe too much cash, or too many people owe you, or you’ve hoarded candy bars!

## Unlock the Full Content!

Dive deeper and gain exclusive access to premium files of Business Management SL. Subscribe now and get closer to that 45 ๐

Business Management SL

# Mastering Liquidity Ratios: Current Vs. Acid Test Explained

669 words
4 mins read
Last edited onย 14th Jun 2024

## What are liquidity ratios? ๐

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

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

## Two main liquidity ratios to know ๐

• Current Ratio
• Acid Test (Quick) Ratio

## Current ratio ๐

• Formula: Current Assets ÷ Current Liabilities
• Real-world Example
• Assets: \$500,000 (total candy bars you have)
• Liabilities: \$250,000 (candy bars you owe)
• Current Ratio = \$500,000 ÷ \$250,000 = 2 or 2:1
• This means for every candy bar you owe, you've got 2 candy bars on hand. Sweet!

## Traffic light guide to current ratio๐ฆ

• ๐ข Green (1.5:1 to 2:1): Ideal. You have a good balance to pay off your debts.
• ๐ด Red (below 1:1): Danger! More debts than assets.
• ๐ก Yellow (very high): Watch out! Maybe too much cash, or too many people owe you, or you’ve hoarded candy bars!

## Unlock the Full Content!

Dive deeper and gain exclusive access to premium files of Business Management SL. Subscribe now and get closer to that 45 ๐