Balance Sheet and Times Better Ratio
Calculate the current ratio for each company. Then, based only on the current ratio answer the following: Which company is more likely to get the loan? Why? Now, calculate the acid-test ratio and see if this changes your opinion.
The acid-test ratio is similar to the current ratio, however it does not include the value of the firm’s inventory. Because inventory is often difficult to sell, this ratio is considered an even more reliable measure of a business’s ability to pay loans than the current ratio. 2. Calculate the acid-test ratio for each business. Then discuss whether this additional calculation confirms your previous decision (that was based only on the current ratio) or if you would change your decision. Be specific The current ratios for the two companies are:
Potz and Pans was 5. And the acid-test ratio was 1. 66 Wanna Bees was 1. 76 and acid-test ratio was 0. 294 The Potz and Pans Company are likely to get the loan because it has a 5 times better ratio of being able to pay.
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WannaBees would not get the loan because; they don’t have enough liquid assets to cover short terms debt. I would not change my original decision about who I would give the loan to; WannaBees would be considered a high risk in Current ratio and Acid-test ratio. Because they have no Liquidity, no liquid assets that can be quickly turned into cash.