Explain and provide a formula for each of the following 1 working Capital 2. Current Ratio...

Explain and provide a formula for each of the following
1 working Capital

2. Current Ratio

3. Acidic- test Ratio

Expert Solution

Ans. 1   Working capital :
   Working capital is the available liquidity capital which is used for daily operations for
   a company.

   Working capital = Total current assets - Total current liabilities

Ans. 2   Current Ratio :
   Current ratio measures the firm's liquidity to meet its short term obligations (liabilities).
   An ideal current ratio is 2 : 1. It means that the current assets should be 2 times of the
   current liabilities.

   Current ratio = Current assets / Current liabilities

Ans. 3   Acid test ratio :
   This ratio also measures the liquidity by using the most liquid current assets (i.e. Cash,
   marketable securities and accounts receivables). Inventory and prepaid expenses are not
   included in the calculation of acid test ratio. An ideal acid test ratio is 1 : 1.

   Acid test ratio = (Cash + Marketable securities + Receivables) / Current liabilities

ekkarill92 answered 1 year ago

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