LIQUIDITY RATIOS - created from Mind Map

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CURRENT RATIO= CURRENT ASSET/CURRENT LIABILITIES

QUICK RATIO=CURRENT ASSET - INVENTORY/CURRENT LIABILITIES

If the current ratio falls below 1 this may indicate problems in meeting obligations as they fall due. BUT In some industries, a current ratio of less than 1 might be considered acceptable. This is especially true of the retail sector which is often dominated by ‘giants’ such as Wal-Mart (in the US) and Tesco (in the UK)

Even if the current ratio is above 1 this does not guarantee liquidity, particularly if inventory is slow moving.BUT Modern manufacturing companies may use just-in-time management techniques to reduce the level of buffer inventory and hence reduce their current ratios to some extent.

very high current ratio is not to be encouraged as it may indicate inefficient use of resources (for example, excessive cash balances). BUT raditional manufacturing industries require significant working capital investment in inventory (comprising raw materials, work in progress and finished goods) and trade receivables.Therefore their current ratio expected to be 2 or more

quick ratio is particularly relevant where inventory is slow moving