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Acid test ratio

Assesses the business’s liquidity position by comparing current assets excluding inventories (stocks), to current liabilities. It is calculated in the same way as the current ratio, ie by dividing current assets less inventories (stock) by current liabilities. Example: If a business’s current assets less inventories amounted to £96,000 and current liabilities amounted to £87,000, then the acid test ratio would be 1.1 : 1 (96,000 / 87,000). Accountants suggest that the ideal is 1:1. This means that for every £1 of short-term assets, the business has £1 of short-term debt. Below this ratio there is a danger that the business has insufficient cash to meet its debts as they fall due.

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