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In: Business and Management

Submitted By tudaxjo
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An indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is. Current ratio is equal to current assets divided by current liabilities. If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liablities exceed current assets, then the company may have problems meeting its short-term obligations.

For example, if XYZ Company's total current assets are $10,000,000, and its total current liabilities are $8,000,000, then its current ratio would be $10,000,000 divided by $8,000,000, which is equal to 1.25. XYZ Company would be in relatively good short-term financial standing.
And according to the information of Morgan company and Parker company, by comparing the two companies the current ration of Morgan it shows that Morgan in each year increases liabilities while Parker increases assets and so in meeting current obligations it seems that parker is able to increase his current obligations than Morgan because in each year he increases assets and reduces liabilities than Morgan who increases liabilities more than assets!

Acidic test ratio is a stringent indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets, acidic test ratio is equal to current assets –inventory divide by current liabilities.

And by comparing the two companies of Morgan and Parker it shows that Parker Company has enough assets that can cover its immediate liabilities more without selling inventory while Morgan company doesn’t have enough assets that can cover its immediate liabilities...

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