working capital management query – quick acid test

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November 11, 2014 at 2:54 pm #209132
anoopahm79
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Hi
I understand in the case of quick acid ratio for low inventory turnover is ideally 1; however I have come across in BPP text in the case of company having faster inventory turnover, the acid text of lower than 1 may not indicate the company is facing cash flow issues, I am not sure I understand this point…appreciate if someone could help on this…thanks
November 12, 2014 at 11:48 am #209305
John Moffat
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It is not called the quick acid ratio – it is either the acid text ratio, or the quick ratio (two names for the same thing).

It is the same as the current ratio with the inventory left out, because it usually takes longer to sell inventory and then receive the cash from customers, then the time we take to pay suppliers. If inventory is being sold quickly then this delay becomes less of a problem.
November 12, 2014 at 12:01 pm #209309
mrjonbain
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As indicated by John Moffat above in cases of quick inventory turnover it is not always a problem.Supermarkets and similar organisations can and do have acid test ratios lower than one and are perfectly healthy in liquidity terms.
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