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

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Quick ratio =  

s

liabilitie

 

Current

inventory

 

less

 

assets

 

Current

 

 

The quick ratio should ideally be at least 1 for companies with a slow inventory turnover. For companies 

with a fast inventory turnover, a quick ratio can be comfortably less than 1 without suggesting that the 

company should be in cash flow trouble. 

Both the current ratio and the quick ratio offer an indication of the company's liquidity position, but the 

absolute figures should not be interpreted too literally. It is often theorised that an acceptable current 

ratio is 1.5 and an acceptable quick ratio is 0.8, but these should only be used as a guide. Different 

businesses operate in very different ways. A supermarket group, for example, might have a current ratio 

of 0.52 and a quick ratio of 0.17. Supermarkets have low receivables (people do not buy groceries on 

credit), low cash (good cash management), medium inventories (high inventories but quick turnover, 

particularly in view of perishability) and very high payables. 

Compare this with a manufacturing and retail organisation, with a current ratio of 1.44 and a quick ratio 

of 1.03. Such businesses operate with liquidity ratios closer to the standard. 

What is important is the trend of these ratios. From this, we can easily ascertain whether liquidity is 

improving or deteriorating. If a supermarket has traded for the last 10 years (very successfully) with 

current ratios of 0.52 and quick ratios of 0.17 then it should be supposed that the company can 

continue in business with those levels of liquidity. If in the following year the current ratio were to fall to 

0.38 and the quick ratio to 0.09, then further investigation into the liquidity situation would be 

appropriate. It is the relative position that is far more important than the absolute figures. 

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CHAPTER 26  

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  INTERPRETATION OF FINANCIAL STATEMENTS