Chapter 4, Problem 13QS

Summary Introduction

Concept introduction:

Current ratio: Current Ratio is measure of the company’s ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities. The formula of the current ratio is as follows:

  $CurrentRatio=\frac{Currentassets}{Currentliabilities}$

Acid test ratio: Acid test ration is also called Quick ratio. This ratio is calculated by dividing the quick assets (Cash, Cash equivalents, Short term investments and current receivables) by total current liabilities for the year. The formula for Acid test ratio is as follows:

  $Acidtestratio=\frac{\left(Cash+Cashequivalents+Shortterminvestments+Accountsreceivables\right)}{CurrentLiabilities}$

To indicate: the difference between the current ratio and acid test ratio and how these ratios reflect the company’s ability to meet its current obligations.