Liquidity-Ratios Igcse Cie

课 Progress

0% Complete

Exam code:0452 & 0985

Liquidity ratios are ways to measure how quickly a business can convert assets into cash
- They compare the current assets to the current liabilities
The liquidity ratios are:
- Current ratio
- Liquid (acid test) ratio

Current ratio

The current ratio is also known as the working capital ratio
- Working capital is current assets minus current liabilities

What is the formula?	$fraction numerator Current space assets over denominator Current space liabilities end fraction$
How should the value be written?	Write as a ratio (X : 1)
How should the value be rounded?	Round to two decimal places
What does the value mean?	The value represents the amount of current assets available to cover each $1 of current liability
How can the ratio be increased?	Increase current assets by introducing capital or selling non-current assets Reduce current liabilities, such as overdrafts and trade payables

A ratio close to 2:1 is generally good
- If it is less than 1:1 then the business does not have enough current assets to cover its current liabilities
- If it is too high then the business could have too much inventory or trade receivables
  - They need to improve their inventory control
  - They need to encourage credit customers to pay faster

Elena and Tom are in a partnership. They provide the following information at 31 March 2024.

Calculate the current ratio. Your answer should be correct to two decimal places.

Answer

Calculate the total current assets
- Trade receivables + Inventory + Bank
- $34 000 + $20 000 + $5 000 = $59 000
Calculate the total current liabilities
- Trade payables + Other payables
- $28 000 + $4 000 = $32 000
Calculate the current ratio
- $fraction numerator Current space assets over denominator Current space liabilities end fraction$
- $fraction numerator 59 space 000 over denominator 32 space 000 end fraction equals 1.84375$
Round to two decimal places and write as a ratio
- Current ratio = 1.84 : 1

The liquid ratio is also known as the acid test or the quick ratio
It measures how well current liabilities are covered by the more liquid forms of current assets—cash and trade receivables

What is the formula?	$fraction numerator Current space assets space minus space Inventory over denominator Current space liabilities end fraction$
How should the value be written?	Write as a ratio (X : 1)
How should the value be rounded?	Round to two decimal places
What does the value mean?	The value represents the amount of cash and receivables available to cover each $1 of current liability
How can the ratio be increased?	Increase current assets, especially cash, by introducing capital or selling non-current assets Reduce current liabilities, such as overdrafts and trade payables

A ratio close to 1:1 is generally good
- If it is above 1:1 then the business has enough liquid assets to cover its short-term debts even if the inventory cannot be sold
- If it is too high then the business could be owed too much by trade receivables
  - They n