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

should be expected. Otherwise, there would be the prospect that the company might be unable to pay its 

debts on time. In practice, a ratio comfortably in excess of 1 should be expected, but what is 

'comfortable' varies between different types of businesses. 

Companies are not able to convert all their current assets into cash very quickly. In particular, some 

manufacturing companies might hold large quantities of raw material stocks, which must be used in 

production to create finished goods inventory. These might be warehoused for a long time, or sold on 

lengthy credit. In such businesses, where inventory turnover is slow, most inventories are not very 'liquid' 

assets, because the cash cycle is so long. For these reasons, we calculate an additional liquidity ratio, 

known as the quick ratio or acid test ratio. 

The quick ratio, or acid test ratio, is calculated as follows.