Liquidity means a firm’s ability to satisfy its short-dues or obligations. These ratios can provide early signs of cash flow problems. Every business wants to cover its due. They need to make sure that they balance the need for safety which liquidity provides. Current ratio and the quick (acid test) ratio are the two main ratios of liquidity.
• Current Ratio is used to measure the firm’s ability to pay its short term dues.
The formula of current ratio is
current assets ? current liabilities.
PepsiCo’s current assets are= 22203
Current liabilities are= 17839
22203/17839 = 1.24
Answer = 1.2:1
The answer suggests the degree of liquidity. The idle situation is 2:1. This means that assets are greater than liabilities. PepsiCo’s current ratio is 1.2:1 this is not the idle situation but still its ratio is acceptable as they have predictable cash flows. The assets are greater than liabilities.
• Quick (acid-test) ratio is used to measure liquidity. It is similar to current ratio but it excluded inventory.
• The formula to calculate quick ratio is: (current assets- inventory) ? current liabilities.
1. Inventory is the assets a business has. The stock which is ready for sale and work in progress is considered inventory.
PepsiCo’s current assets (as per the table) are= 22203
Inventory (as per the table) is= 3409
Current liabilities (as per the table) are= 17839
18794/ 17839= 1.05
Quick ratio helps a firm to see over all liquidity. If inventory is liquid the current ratio is a preferred measure of overall liquidity. Inventory is excluded from quick ratio merely of two reasons one that most of the inventories cannot be easily sold, second inventory is sold on credit.
It is a measure to see at which speed different accounts are converted into sales and cash. A number of ratios are available for measuring the activity of the accounts such as current accounts. Inventory turnover, average collection period, average…