Calculate current and acid-test ratios
Measure short-term liquidity using the syllabus current ratio and acid-test ratio, and present each as a ratio.
Section 6.1 · Calculation and understanding of accounting ratios
Cambridge IGCSE Accounting 0452 / (9–1) 0985, 2027–2029 Version 1. These lessons follow the 2027–2029 syllabus only; the separate 2026 syllabus update is not yet mapped. Written practice is self-checked, not an official Cambridge grade. Full timed-paper practice and human subject-teacher review remain pending.
Before you begin
- No previous accounting study is assumed. Keep the business, transaction and accounting period in view, and distinguish a resource, a claim and a performance result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Current assets are $18,000 and current liabilities $12,000. What is the current ratio?
What you will learn
- Calculate the current ratio
- Calculate the acid-test ratio
- Explain what including or excluding inventory changes
Use both liquidity formulae
Current (working capital) ratio = current assets ÷ current liabilities. Present the answer as a ratio, for example 1.5:1.
Acid-test (liquid) ratio = (current assets − inventory) ÷ current liabilities. It excludes inventory because inventory may take time to sell before it becomes cash.
Interpret the result with context
The ratios compare short-term resources with short-term obligations. A higher figure is not automatically better: excess cash or slow-moving inventory can indicate a different issue, and the business context matters.
Use the same date and classification for all balances. Do not subtract receivables or cash from current assets unless the question instructs otherwise; only inventory is excluded in the syllabus formula.
Pause and explain
Current assets are $25,000, inventory $9,000 and current liabilities $16,000. Calculate the acid-test ratio.
Worked example
Current assets are $30,000, including inventory $12,000. Current liabilities are $20,000. Calculate both liquidity ratios and show each as a ratio.
Show the worked solution
- Current ratio = 30,000 ÷ 20,000 = 1.5.
- Acid-test numerator = 30,000 − 12,000 = $18,000.
- Acid-test ratio = 18,000 ÷ 20,000 = 0.9; present as 0.9:1.
Answer Current ratio 1.5:1; acid-test ratio 0.9:1.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A business has cash $5,000, receivables $8,000, inventory $7,000, payables $10,000 and an overdraft $2,000. Calculate the current and acid-test ratios.
Give me a hint
Add current assets and liabilities, then exclude inventory only for the acid test.
Compare my reasoning
- Current assets = 5,000 + 8,000 + 7,000 = $20,000; current liabilities = 10,000 + 2,000 = $12,000.
- Current ratio = 20,000 ÷ 12,000 = 1.67:1.
- Acid test = (20,000 − 7,000) ÷ 12,000 = 1.08:1.
Current ratio 1.67:1; acid-test ratio 1.08:1.
Look for these in your work
- Balances classified
- Current ratio correct
- Inventory excluded only for acid test
A business has current assets $44,000, including inventory $20,000, and current liabilities $22,000. Calculate both ratios and explain why they differ.
Give me a hint
Apply the current-assets total to both, excluding stock only in the acid-test numerator.
Compare my reasoning
- Current ratio = 44,000 ÷ 22,000 = 2:1.
- Acid-test ratio = (44,000 − 20,000) ÷ 22,000 = 1.09:1.
- The acid test is lower because it excludes inventory.
Current ratio 2:1; acid-test ratio 1.09:1. The difference reflects the inventory excluded from the liquid-asset calculation.
Look for these in your work
- Current ratio correct
- Acid-test ratio correct
- Difference explained
A manager reports an acid-test ratio of 1.6:1 using current assets $48,000 and current liabilities $30,000. Inventory is $14,000. Correct the ratio and show the mistake.
Give me a hint
Remove inventory before dividing by current liabilities.
Compare my reasoning
- The manager's 48,000 ÷ 30,000 = 1.6:1 is the current ratio.
- Acid-test numerator = 48,000 − 14,000 = $34,000.
- Correct acid-test ratio = 34,000 ÷ 30,000 = 1.13:1.
The reported 1.6:1 is the current ratio. The acid-test ratio is 1.13:1.
Look for these in your work
- Mistake identified
- Inventory removed
- Correct ratio presented
Common mistakes
- Leaving inventory in the acid-test numerator
- Presenting a liquidity ratio as a percentage
- Using total assets instead of current assets
- Treating a high ratio as proof of sound cash management
What can you explain now?
Which asset is subtracted in the acid-test formula?
Compare with the explanation
Inventory
The acid test excludes inventory from current assets.
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Make it stick
What does the acid-test ratio exclude that the current ratio includes?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.