Are current ratio and quick ratio the same?
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No, they are not the same. They are both used to measure the short term liquidity of a business but their approach is different. Following are the differences between the two :
Let’s take an example:-
Following is the balance sheet of X Ltd:-
Hence, as per the following information,
Current Ratio = Current Assets / Current Liabilities
= Inventories + Trade debtors + Bills receivables + Cash and bank + Prepaid Expenses / Trade Creditors + Bills Payables + Outstanding Salaries
= ₹85,000 + ₹2,50,000+ ₹95,000 + ₹1,50,000 + ₹10,000/ ₹2,00,000 + ₹75,000 + ₹25,000
= ₹6,00,000 / ₹3,00,000
= 2/1 or 2:1
Quick Ratio = Quick Assets / Current Liabilities
= Trade debtors + Bills receivables + Cash and bank / Trade Creditors + Bills Payables + Outstanding Salaries
= ₹2,50,000+ ₹95,000 + ₹1,50,000 / ₹2,00,000 + ₹75,000 + ₹25,000
= ₹5,05,000/ ₹3,00,000
= 41 / 25 or 1.68 : 1
Let’s discuss both ratios in detail.
The current ratio represents the relationship between current assets and current liabilities
Current ratio = Current Assets/Current Liabilities
It measures the adequacy of the current assets to current liabilities. The main question this ratio tries to answer is: – “Does your business have enough current assets to meet the payment schedule of its current debts with a margin of safety for possible losses in current assets?”
The generally acceptable current ratio is 2:1. But it depends on the characteristics of the assets of a business to judge whether a specific ratio is satisfactory or not.
Quick Assets = Current Assets – Inventories – Prepaid assets
Quick ratio = Quick Assets/Current Liabilities
Inventories are not considered near cash assets.
The quick ratio is a more conservative approach than the current ratio to measure the short term liquidity of a firm.
It answers the question, “If sales revenues disappear, could my business meet its current obligations with the readily convertible quick funds on hands?”
1:1 is considered satisfactory unless the majority of the quick asset are accounts receivable and the receivables turnover ratio is low.