Acid Test 1100 Words You Need Week 41 Day 2

Acid Test 1100 Words You Need Week 41 Day 2

Acid Test 1100 Words You Need Week 41 Day 2

the conclusive test of value or success, decisive test, litmus test, touchstone, indicator, trial, criterion, confirmation

The acid test (or quick ratio) recognises that inventory often takes a long time to convert into cash. It therefore excludes inventory values from liquid assets. Traditionally textbooks tell us that this ratio should exceed 1:1 but once again many successful companies operate below this level.

In practice a company’s current ratio and acid test should be considered alongside the company’s operating cash flow. A healthy cashflow will often compensate for weak liquidity ratios.

Source: https://www.accaglobal.com/