Acid Test Ratio Assignment Help
Acid test ratio also referred to as Quick ratio test, it is a more severe measure of liquidity because inventories, which are a minimum liquid of existing assets, are excepted from the ratio. In this procedure, inventories have to go through a two-step procedure, first being sold and converted into receivables and also collected. The acid test ratio is so called because it provides the aptitude of the firm to pay its liabilities without depending on the sale and regaining of its inventories. We are no.1 in providing Acid Test Ratio Assignment help to the students of accountancy who feel a little bit of professional help can make a huge difference in the quality of their writing. Our Assignment writer in Sydney are extremely efficient in acid test ratio calculations.
Calculation of Acid Test Ratio in a Balance Sheet
Acid test ratio is a more severe version of current ratio that is used to recognize the pass or fail value. From the available current balance sheet, all the important data needed to calculate Acid Test ratio can be found.
The Acid Test Ratio = (Cash + Accounts Receivables + Short-term Investments) / Current Liabilities
Here, the term short-term investments comprise of marketable securities that are highly liquid in nature. On the other hand, the current liabilities as depicted above include the items like the accrued liabilities, accounts payable, and short-term debts. In the acid-test ratio, the cost of existing inventory doesn’t take into consideration.
Let’s demonstrate the acid test ratio by taking into account that a company has cash of $8,000, short-term marketable securities of $30,000, accounts receivables of $90,000, and current liabilities $ 100,000. So, using the above-mentioned formula we get the acid test ratio as 1.28:1.00
If a company is possessing a ratio of at least 1.0 which means they have sufficient existing liquid assets to cover their bills. Several factors can impact this figure; the timing of asset purchases, timing of raised capital, allowances for bad debt and accounts receivable management policies are all significant determinants of the acid-test ratio. Acid test ratio can show how easily a company can meet their current obligations. The bigger the acid test ratio, the more easily the company can be able to meet its current liabilities.
It is easy to compare Acid Test ratios among publicly listed businesses within the same industry, as the Generally Accepted Accounting Principles (GAAP) is compulsory by the Securities and Exchange Commission (SEC). In the balance sheet, the cash on hand receivable is recorded under the assets section of the balance sheet. On the other hand, the accounts payable, accrued expenses payable, and short-term amounts payable are all recorded under liabilities. Since capital requirements vary among industries, it is best to compare any working capital ratios among like companies or across time with the same firm.
Advantages and Disadvantages of Acid Test Ratio
Acid Test ratio helps to measure the liquidity of an organization and its capability to adjust the short-term liabilities. Acid test ratio is actually another version of the current ratio and attempts to mitigate the limits of the current ratio.
In some situations, just due to the large inventory base, the short-term financial strength may be exaggerated if current ratio is applied. With the help of Acid test ratio, this condition can be controlled. It is a great hindrance in getting a further loan.
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