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Ratio Analysis > Liquidity > Flashcards

Flashcards in Liquidity Deck (15)
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1
Q

What are the liquidity ratios

A

The current ratio and the quick ratio

2
Q

What does the current ratio compare

A

The current assets of the business to its current liabilities

3
Q

How is the current ratio express d

A

As a ratio x : 1

4
Q

How is the current ratio calculated

A

As current assets / current liabilties

5
Q

What does a higher current ratio mean

A

The higher the ratio the more liquid the business is

6
Q

What should the current ratio be

A

Neither too high or too low for my

7
Q

If the current ratio is too high…

A

It means excess funds tied up in liquid assets which could be used elsewhere

8
Q

If the current ratio is too low….

A

The business will be unable to meet debts as they fall due

9
Q

What does the ideal current ratio depend on

A

The type of business

10
Q

What else is the quick ratio known as

A

The Acid Test Ratio

11
Q

How does the quick ratio compare to the current ratio

A

It is a more exact test of liquidity than the current ratio

12
Q

What does the quick ratio exclude

A

It excludes inventories as they cannot be turned into cash quickly

13
Q

How is the quick ratio expressed

A

As a ratio of x : 1

14
Q

How is the quick ratio calculated

A

As current assets (excluding inventories)/ current liabilities

15
Q

If the quick ratio is higher…

A

The business is more liquid