hello everyone hi welcome to the channel
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to learn something that is called quick ratio what are the very important ratio
for liquidity purpose which is also known as acid test ratio we’ll be using
some formulas you’ll be learning formulas and we’ll try and see the
examples let’s start we’ll see something over here as a graph what do we see over
here is that current ratio quick ratio of various companies over here so let’s
let’s see what we analyzed see we see that you know there’s one line over here
off of a company which it says 1.240 and the lowest is 0.576 so sometimes you know you can say the current assets may contain
huge amount of inventory prepaid expenses etc so this means Q basically
the current ratio interpretation as this items are not very liquid and to address
this issue if we consider the only most liquid assets like cash and cash
equivalents and receivables and it should provide you can say receivable
that means your data is over here and then basically it should provide us with
a better picture on the coverage of these short-term obligations so this
ratio is also known as your quick ratio or you can also say that it’s your acid
test ratio okay so Procter & Gamble over here P&G
ratio is healthy 1.098 right in 2016
however the quick ratio is 0.576 over here right you can see this and
this implies that a significant amount of Procter & Gamble’s a current asset is
stuck in lesser liquid assets like inventory and prepaid expenses so that’s
a good thing current ratio definition that’s what we
are going to learn first quick ratio sorry I mean not current assets quick
ratio so quick ratio is a liquid ratio which is used as a measure of ability of
the company to meet its current obligation
now it is utilized it is it utilized to assess whether a business has suffered
whether the business has sufficient sorry business has sufficient assets
that can be translated into cash to pay its bills so the key elements of the
current assets that are included in the quick ratio and the asset test ratio are
your cash your marketable security right and an accounts receivable sundry debtors if any excluding inventory so inventory should not be part of this where as in
quick liabilities include all the current liability excluding you need to
exclude in case of the current liability something that is called as Bank OD
since this particular thing it can be quite difficult to sell off in this
short term end and then possibly at you can see at a loss so since the bank
overdraft is secured by the inventories the other your current assets must be
sufficient to meet the other current liabilities or due to this prohibition
of the inventory from the formula the acid test ratio is a better sign you
can say a completely a better sign than the current ratio of the ability of the
company to pay it’s instant obligation and it is also known as your acid test
or the liquid ratio so what exactly goes in in the formula let’s understand quick
ratio has some details in the in the formula as follow quick ratio is equal
to your quick assets divided by your quick liabilities so what goes in around
in quick assets and quick liabilities let’s understand that when we talk about
your quick assets you have things like over here as your cash and cash
equivalents okay that’s the first thing that should
go in then your accounts receivable the saw the two things should be part of it
and in case of the current liability that is your quick liabilities all you
need to do is your current liability CL less your bank OD that’s all you need to
do so a quick ratio is considered good if
it is one is two if it is having a ratio of 1 is to 1 that indicates a high
solvent position and the ratio serves as a supplement basically to current ratio
in analyzing the liquidity now the importance of the quick ratio see the
quick ratio is one of the more major tools for the decision making and it
proved it it previews the ability of the company to make settlements and its
settlements of its it’s it’s quick liabilities in a very short notice
period so the major importance importance of the current ratio are
mentioned something like this over here the acid test ratio eliminates the
closing stock from its computation which may not be
necessary be always be taken as liquid and thereby giving a more suitable
profile of the liquidity position of the company second since the closing stock
is separated from the current assets and the OD overdraft and your cash credit
CCR emulated from the current laboratory as they are usually secured by the
closing stock you can see thereby preparing the ratio more worthy in in
ensuring the liquidity position of the company third evaluation of closing
stock can be really very sensitive okay and it may not always be at the saleable
value therefore the quick ratio is not impaired
it is not impaired as there is no requirement for the evaluation of the
closing stock forth closing stock can be seasonal in nature okay and an over a
yearly period it may vary in quantities so if it contemplates that it may
collapse or escalate the liquidity status so by ignoring the closing stock
from the computation acid test ratio does away the issue right now in the
sinking industry okay in the sinking industry which generally may have a very
high-level offer closing stock the ratio will be helpful in providing more
authentic a repayment ability of the company as against the current ratio
including the closing stock sixth the because of the major
inventories pays short-term financial strength of a company may be overstated
okay and if the current ratio is utilized by using the acid test ratio
this situation can be tackled and will limit the companies getting an
additional loan then the servicing of which may not be as simple as as reflect
by be reflected by current ratio so now let’s understand an example on the same
so that we have some idea this is a following other details you know the
information extracted from the audited records at at a large sized industrial
company these are some of the details current assets inventory current
liabilities and Bank ot now we need to assume that the current assets over here
is equal to your cash and cash equivalents your accounts receivable
inventory so there are no other items included in the current assets now you
are required to calculate the quick ratio and analyze the trend of the ratio
for judging these short-term liquidity and solvency of the company so let’s
let’s answer the this this particular example now what is the current assets
over here the current assets is going to be a first let me write a it is is going
to be your 1,10,000 details and 65,000 just let’s pull down
the numbers then you need to deduct something that is your inventory over
here once you deduct inventory I’m keeping this in yeah so let’s pull
this number over here so we’ll get what your quick assets you just need to
deduct this so you have your quick assets now let’s take up the current
liability over here now this current liability is going to be your this
amount 66,000 and you need to deduct that as your bank OD
od from here let’s deduct the bank OD control-r so we have of a quick
liability so let’s quickly just deduct this from this Bank OD control R so
finally we can calculate your quick ratio as your quick assets divided by
your quick liabilities and there we go we have our answer as 1.7 and and and so
on and so forth so from the above calculation data we
have analyzed that in 2011 onwards 1.7 1.2,0.9, 0.7 in 0.6 so the
liquidity position is going down and down and below one it is not actually
good it means that in no company’s not in a position to meet its immediate
current liability and it may lead to any technical solvency
hence the step should be taken to reduce the investments in the in the in the
inventory and see that the ratio is one is to one see the idle is 1:1
absolutely undoubtedly it means that the company is not in a position to meet its
immediate current liability and it may lead to technical solvency and hence you
know this steps should be taken so that’s it for this particular topic if
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