Chapter 8, Problem 18DQ

To determine

Concept introduction:

Liabilities:

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:

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

Cash ratio:

Cash ratio is calculated by dividing and cash and cash equivalents by the total current liabilities. The formula for Cash ratio is as follows:

Cash Ratio = Cash and cash equivalents/ Current liabilities

To indicate:

The situation in which current, quick and cash ratios are the most appropriate measures of the liquidity.