Trabsaction which will affect debt-equity ratio but not current ratio
Answers
Explanation:
Both the current ratio and quick ratio measure a company's short-term liquidity, or its ability to generate enough cash to pay off all debts should they become due at once. Although they're both measures of a company's financial health, they're slightly different. The quick ratio is considered more conservative than the current ratio because its calculation factors in fewer items. Here's a look at both ratios, how to calculate them, and their key differences.
What's Included in the Current Ratio
The current ratio measures a company's ability to pay current, or short-term, liabilities (debt and payables) with its current, or short-term, assets (cash, inventory, and receivables).
Current assets on a company's balance sheet represent the value of all assets that can reasonably be converted into cash within one year. Examples of current assets include:
Cash and cash equivalents
Marketable securities
Accounts receivable
Prepaid expenses
Inventory
Current liabilities are the company's debts or obligations on its balance sheet that are due within one year. Examples of current liabilities include:
Short-term debt
Accounts payable
Accrued liabilities and other debts
Calculating the Current Ratio
You can calculate the current ratio of a company by dividing its current assets by current liabilities as shown in the formula below:
\text{Current Ratio}= \frac{\text{Current Assets}}{\text{Current Liabilities}}Current Ratio=
Current Liabilities
Current Assets
If a company has a current ratio of less than one then it has fewer current assets than current liabilities. Creditors would consider the company a financial risk because it might not be able to easily pay down its short-term obligations.
If a company has a current ratio of more than one then it is considered less of a risk because it could liquidate its current assets more easily to pay down short-term liabilities.
What's Included in the Quick Ratio
The quick ratio also measures the liquidity of a company by measuring how well its current assets could cover its current liabilities. However, the quick ratio is a more conservative measure of liquidity because it doesn't include all of the items used in the current ratio. The quick ratio, often referred to as the acid-test ratio, includes only assets that can be converted to cash within 90 days or less.
Current assets used in the quick ratio include:
Cash and cash equivalents
Marketable securities
Accounts receivable
Current liabilities used in the quick ratio are the same as the ones used in the current ratio:
Short-term debt
Accounts payable
Accrued liabilities and other debts
Calculating the Quick Ratio
The quick ratio is calculated by adding cash and equivalents, marketable investments, and accounts receivable, and dividing that sum by current liabilities as shown in the formula below:
\begin{aligned} \text{Quick Ratio}= \frac{ \begin{array}{c} \text{Cash}+\text{Cash Equivalents }+\\ \text{Current Receivables}+\text{Short-Term Investments} \end{array} }{\text{Current Liabilities}} \end{aligned}
Quick Ratio=
Current Liabilities
Cash+Cash Equivalents +
Current Receivables+Short-Term Investments
If a company's financials don't provide a breakdown of their quick assets, you can still calculate the quick ratio. You can subtract inventory and current prepaid assets from current assets, and divide that difference by current liabilities.
Similar to the current ratio, a company that has a quick ratio of more than one is usually considered less of a financial risk than a company that has a quick ratio of less than one.
Key Differences
The quick ratio offers a more conservative view of a company’s liquidity or ability to meet its short-term liabilities with its short-term assets because it doesn't include inventory and other current assets that are more difficult to liquidate (i.e., turn into cash). By excluding inventory, and other less liquid assets, the quick ratio focuses on the company’s more liquid a