Lecture 1 Acid Test Ratio
It ignores the least liquid of the firm´s current assets – inventories. By eliminating the value of the
inventories from the acid-test ratios, the users of accounts are given a clearer picture of the firm´s
ability to pay short-term debts.
ACID-TEST RATIO – LIQUID ASSETS
LIQUID ASSETS – CURRENT ASSETS – INVENTORIES = LIQUID ASSETS
POINTS TO NOTE:
Results below 1 are often viewed with caution by accountants as this means that the
business has less than 1$ of liquid assets to pay each1$ of short-term debt.
The full picture needs to be gained by looking at previous year´s results.
Firms with very high inventory levels will record very different current and acid test ratio