What is the ratio of acid test?
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Acid test ratio is the company's in -depth accounting to adequate management of outstanding obligations currently held by the company. This process does not include taking into account all the company's palpable and intangible assets and the application of value to indebtedness at present in the possession of the organization. With the ratio of acid test, only as part of the evaluation is considered to include prepaid services and the value of goods in the inventory. Here are some of the reasons why the application of the acid test may be.
While there are several functions of the acid test ratio, the main purpose is not to determine whether the company has enough total assets that could be disposed of to pay all outstanding debts. Instead, it is the idea of finding out whether the company has current reasonable liquid assets to pay off the debt in the conditions and is still able to maintain an ongoing operation. Therefore, such an activation of supplies and prepaid services are not included in the proCESU factoring.
Business concludes would sell an inventory with a reduced rate and would suspend any prepaid services, but a company that wanted to continue operation to get an exact picture of the state of the company that intends to continue the production of goods and services.
Simple formula for administration of acid test ratio is the division of rapid clean assets in the hand by a currency value of outstanding obligations. For example, a company that held current liquid assets of $ 1,000,000 (USD) and had outstanding obligations of $ 500,000 should have a positive ratio of assets to debt. For the same reason, a company with a high amount of debt and relatively few liquid assets would have a negative ratio of acid tests and would not be considered as timeRou investment or credit risk. This would be the case even if the company had an inventory that would sell for more than enough to leave the debt.
, along with a viable way to create a company's financial health, the use of an acid test to the state of corporation can be useful in avoiding future problems. If the evaluation suggests that the company's current is working under the negative ratio of acid test test, the time to reduce operating costs and eliminates any expenditure that is not central to the company's life can help the company's status into positive. The use of the ratio of acid test as a way to ensure that all sources of the company are used for the best advantage is the important process of all sizes, from domestic businesses to multinational corporations.