I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART H: INTERPRETATION OF FINANCIAL STATEMENTS 

 

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(d) Similarly, 

taking credit from creditors can be seen as a reason why cash payments are delayed. 

The company's liquidity position will worsen when it has to pay the suppliers, unless it can get 

more cash in from sales and receivables in the meantime. 

The liquidity ratios and working capital turnover ratios are used to test a company's liquidity, length of 

cash cycle and investment in working capital. 

4.7 Liquidity ratios: current ratio and quick ratio  

The 'standard' test of liquidity is the current ratio. It can be obtained from the statement of financial 

position. 

FORMULA TO LEARN 

Current ratio = 

s

liabilitie

 

Current

assets

 

Current

 

 

The idea behind this is that a company should have enough current assets that give a promise of 'cash to 

come' to meet its future commitments to pay off its current liabilities. A current ratio in excess of 1