Acca financial Accounting (FA) Study Text ac ca (FA)

6 

Liquidity and Efficiency ratios 

These ratios assess the liquidity/solvency of a business (i.e. the ability to meet 

debt obligations) and how efficiently the entity manages its working capital 

resources. 

Current ratio 

Current or working capital ratio: 

Current assets

Current liabilities

 

: 

1 

The current ratio measures the adequacy of current assets to meet liabilities as 

they fall due. 

A high or increasing figure may appear safe but should be regarded with 

suspicion as it may be due to: 

•

 

high levels of inventory and receivables (this could mean inventory is 

unsaleable or that credit control is weak) 

•

 

high cash levels which could be put to better use (e.g. by investing in non-

current assets). 

---