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Quick/Liqudity ratio

rudram77 (Assitant Accounts Manager) (166 Points)

18 December 2009

Why closing stock has to deduct from current assets while caluculatin Quick/liqudity ratio

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10 Replies

CA.Tarun Maheshwari (CA, DISA) (7150 Points)
Replied 18 December 2009

Quick ratio considers the assets which is convertible into cash immediately. Closing stock takes time to sell and convert into money terms. thats why it is not considered into quick ration but considered in current ratio.

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CourseCart.in (Mentor at SHAYVIDZ Academy) (3756 Points)
Replied 18 December 2009

Quick ratio

In finance, the Acid-test or quick ratio or liquid ratio measures the ability of a company to use its near cash or quick assets to immediately extinguish or retire its current liabilities. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values.

$\mbox{Quick (Acid Test) Ratio} = {\mbox{Cash and Cash Equivalent} + \mbox{Marketable Securities} + \mbox{Accounts Receivable}\over \mbox{Current Liabilities}}$

Generally, the acid test ratio should be 1:1 or better, however this varies widely by industry. In general, the higher the ratio,the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).

Notice that very often Acid test refers instead of Quick ratio to Cash ratio:

$\mbox{Acid Test Ratio} = {\mbox{Cash} + \mbox{Marketable Securities}\over \mbox{Current Liabilities}}$

Stock at the end of the can not be presumed as quickly convertible to cash that y it is deducted in to find out Quick Current Assets..

Adarsh

Prabeer (B. COM (H) CA & CS Final) (5484 Points)
Replied 18 December 2009

Originally posted by : Prakash Reddy
	Why closing stock has to deduct from current assets while caluculatin Quick/liqudity ratio

As,in deriving Quick Ration only those factors are considered which can be realised in cash very effeciently and within no time span.

A stocks require some considerable time to get sold and there's even no surity that all the stock will fetch some value.

Prabeer (B. COM (H) CA & CS Final) (5484 Points)
Replied 18 December 2009

Originally posted by : Prakash Reddy
	Why closing stock has to deduct from current assets while caluculatin Quick/liqudity ratio

That is why Closing Stock is not considered in calculating Quick Ration.

Sonia Verma (state govt employee) (347 Points)
Replied 19 December 2009

Originally posted by : Þräßéêr
	Originally posted by : Prakash Reddy Why closing stock has to deduct from current assets while caluculatin Quick/liqudity ratio That is why Closing Stock is not considered in calculating Quick Ration.

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CA Anshuman Dhunna (CA ) (122 Points)
Replied 19 December 2009

closing stock is deducted bcoz of its nature of liquidity as compared to other current assets

kabita periwal (audit assistant B.Com NCFM(Capital Market Module)) (41 Points)
Replied 19 December 2009

Originally posted by : CA.Tarun Maheshwari
	Quick ratio considers the assets which is convertible into cash immediately. Closing stock takes time to sell and convert into money terms. thats why it is not considered into quick ration but considered in current ratio.

I agree wid Tarun Sir.

CA Bhuvnesh Kumar (Chartered Accountant) (69 Points)
Replied 19 December 2009

In computation of Quick Ratio only those current assets are considered which are readily convertible in money say 1 or 2 days.

As name suggest this is Quick ratio i.e. only Quick item should be considered.

Closing stock is a item which may take considerable time sometime to convert in money i.e. why closing stock is excluded in computation of Quick Ratio.

Bharat Khurana (Student) (153 Points)
Replied 21 December 2009

while calculating quick ratio only those current assets are taken which are readily convertible into money but stock is not readily convertible into money so it is not taken while calculating quick ratio

CA. Akhil Maangal (Head - Finance & Accouunts) (131 Points)
Replied 21 December 2009

Quick Ratio= Quick assets/Quick Liabilities

Quick assets means all those assets which can be easily converted into cash. Closing stock cant be converted into Cash immediately. If one can convert the closing stock in cash immediately then why to do business???

Quick liabilities means all current liabilities which may be required to pay off immediately. All current Liabilities may be required to be paid off immediately other than Cash Credit. Because Cash Credit is required to be paid off only after certain period.