The figures in the table below were taken from the final accounts of BioMed Ltd - Leaving Cert Business - Question 5B - 2019

The Current Ratio is calculated using the formula: $ext{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$

For 2017: $\text{Current Ratio} = \frac{40,000}{20,000} = 2:1$

For 2018: $\text{Current Ratio} = \frac{62,500}{25,000} = 2.5:1$

The Acid Test Ratio is calculated using the formula: $\text{Acid Test Ratio} = \frac{\text{Current Assets} - \text{Closing Stock}}{\text{Current Liabilities}}$

For 2017: $\text{Acid Test Ratio} = \frac{40,000 - 10,000}{20,000} = \frac{30,000}{20,000} = 1.5:1$

For 2018: $\text{Acid Test Ratio} = \frac{62,500 - 42,500}{25,000} = \frac{20,000}{25,000} = 0.8:1$

The current ratio increased from 2:1 to 2.5:1, which is above the ideal ratio of 2:1. This indicates that the company has improved its ability to cover short-term liabilities with its current assets.

However, the acid test ratio decreased from 1.5:1 to 0.8:1, which is below the ideal level of 1.1. This suggests that while the company has more current assets, it has a significant amount of stock that may not be easily converted to cash, indicating potential liquidity risk.

Overall, the business is carrying too much stock in its current assets, which might lead to difficulties in accessing cash when needed, as stock can take time to sell.