Sample Thesis Paper
Inventory is the least liquid of all the current assets given in the Balance Sheet. The Acid test (quick) ratio solves the issue by deducting inventory from current assets and divides the remainder by current liabilities. The result is the Acid test (quick) ratio which gives a truer depiction of the ability of the firm to cover its day to day obligations with its current assets. The Acid test (quick) ratio is similar to the current ratio in the fact that the higher the Acid test (quick) ratio, the greater the firm is at ease to cover its short term liabilities (Correia 2007).
The Cash Ratio further refines the Current Ratio and the Acid test (quick) ratio by deducting all inventories, receivables and other illiquid assets from current assets. The resulting amount is cash and cash equivalents and these are divided by current liabilities (Loth 2009). The Cash Ratio is used infrequently by firms or investors as it is not possible for a firm to be successful and yet maintain high amounts of liquid cash. This cash would be lying idle and no return earned on the cash. It is severely restricted in its usefulness from the perspective of a company. However, it still gives a good depiction of the situation of the company’s cash position and the ability to meet short term obligations. The cash ratio will obviously be lower than the Current Ratio and the Acid test (quick) ratio (Carlsson 2008).