Many lenders prefer the acid test ratio when deciding whether to give you a loan because of the test’s strictness. Stock isn’t included in calculating the ratio.
To calculate the acid test ratio you must do a two-step process:
Determine your quick assets.
Cash + Debtors (Accounts Receivable) + Marketable securities = Quick assets
Calculate your quick ratio.
Quick assets – Current liabilities = Quick ratio
The following is an example of an acid test ratio calculation:
£2,000 + £1,000 + £1,000 = £4,000 (quick assets)
£4,000 – £2,200 = 1.8 (acid test ratio)
Lenders consider a business with an acid test ratio around 1 to be in good condition. An acid test ratio less than 1 indicates that the business may have some difficulty settling its day-to-day liabilities.
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Source:http://www.dummies.com/how-to/content/stricter-bookkeeping-methods-the-acid-test-quick-r.html
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