Page 123 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes
Figure 6.2

Notes Standard norm of the current ratio:
The ideal norm is 2:1; which means that every one rupee of current liability is appropriately
covered by two rupees of current assets.

High ratio leads to greater the volume of current assets more than the specified norm denotes
that the firm possesses excessive current assets than the requirement portrays idle funds invested
in the current assets.
A big limitation of current ratio is that under this ratio, the current assets are equally weighed
against each other to match the current liabilities. One rupee of cash is equally weighed at par
with the one rupee of closing stock, but the closing stock and prepaid expenses cannot be
immediately realized like cash and marketable securities.

Acid Test Ratio/Quick Assets Ratio

It is a ratio expresses the relationship in between the quick assets and current liabilities. This
ratio is to replace the bottleneck associated with the current ratio. It considers only the liquid
assets which can be easily translated into cash to meet out the financial commitments.

Liquid Assets
Acid Test Ratio (Quick Assets Ratio) =
Current Liabilities
Liquid Asset = Current Assets – (Closing Stock + Prepaid Expenses)

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