Acid Ratios Essay Example | Topics and Well Written Essays - 1000 words

Acid Ratios - Essay Example The current ratio uses total current assets and total current liabilities. Total current assets are divided by total current liabilities to give the current ratio. Meanwhile, acid test ratio is found by the use of total current assets, total current liabilities, and inventory. The equation for the quick ratio is inventory taken away from total current assets and divided by total current liabilities. 1. In order to work out the current ratio for Thingamajigs and Things, we first need to find out the components of the equation so we can calculate the current ratio. Thingamajigs and Things’ total current assets are worth $45,000, and their total current liabilities are $9,000. If we divide the total current assets by the total current liabilities then we get a ratio of exactly 5 (Lane, 2011). In looking at WannaBees, we can see that they have total current assets of $150,000 and total current liabilities of $85,000. Once we conduct the calculation for the current ratio, we get a figure of 1.76 (Lane, 2011). In determining what these numbers mean, we first have to judge what figure is an acceptable figure to have. The current ratio should not go below 1 or else the company should be concerned (Kennon, 2011). In general, a high current ratio shows that the business has sufficient amounts of cash on hand and cannot be considered a financial risk. In this case, Thingamajigs and Things has a much higher current ratio than WannaBees. If both of these companies were applying for a bank loan, Thingamajigs and Things would be more likely to receive it. 2. Thingamajigs and Things’ total current assets are $45,000, its total current liabilities are $9,000, and its inventory is worth $30,000. If we conduct an acid test ratio, we come up with a figure of 1.67 (Lane, 2011). On the other hand, WannaBees has total current assets of $150,000, total current liabilities of $85,000, and an