Current Position Analysis

Solvency Ratios:

Current Position Analysis

1. Working capital 

Formula = current asset – current liabilities

2. Current Ratio – Let's you know how many times current assets can cover current liabilities

Current Assets/Current Liabilities (current assets divided by current liabilities)

3. Acid Test Ratio aka Quick Test (to show how quickly a business can fulfill its obligations, simply put how quickly they can pay off debt if they had to)

Quick Assets/Current liabilities (quick assets – cash/securities, etc divided by current liabilities.

	Current Year	Preceding Year
Cash	$280,000	$265,000
Marketable Securities	131,000	121,000
Accounts & Notes Rec (net)	395,000	384,000
Inventories	570,000	555,000
Prepaid Expenses	19,000	40,000
Account & Notes Payable (net)	250,000	285,700
Accrued Liabilities	60,000	64,300

Current Assets in blue

Current Liabilities in green

a) determine for each year (1) the working capital (2) the current ratio & (3) the acid-test ratio.

b) What conclusions can be drawn from these data as to the company's ability to meet its currently maturing debts?

Let's do this: For the sake of simplicity, let's use 2009 & 2008

1. Working capital

	2009	2008
Assets	$1,395,000	$1,365,000
Liab	-310,000	-350,000
Total	$1,085,000	$1,015,000

2. Current Ratio

	2009	2008
Assets	$1,395,000	$1,365,000
Liab	Divide by 310,000	Divide by 350,000
Total	4.5	3.9

This means in 2009, current obligations can bet met 4.5 times compared to 3.9 times in the preceding year. 

3. Acid Test

Quick Assets = Cash, Marketable Securities, Receivables divided by current liabilities

	2009	2008
Quick Assets	$806,000	$770,000
Liab	Divided by 310,000	Divided by 350,000
Total	2.6	2.2

 

This means that 2008 the quick assets could cover the liabilities 2.2 times and in 2009, it improved to 2.6