The following are figures relating to Laser Ltd. Current Assets 90,000 85,000 Current Liabilities 60,000 40,000 Closing Stock 20,000 25,000 Calculate the Acid Test Ratio for 2003 and 2004. 2003 2004 Indicate, by means of a tick (✓), whether the trend is improving or disimproving and give one possible reason for this. Improving Disimproving Reason:

Leaving Cert Business Business Accounts & Ratio Analysis: The following are figures relati

The following are figures relating to Laser Ltd - Leaving Cert Business - Question 8 - 2005

Question 8

The following are figures relating to Laser Ltd. Current Assets 90,000 85,000 Current Liabilities 60,000 40,000 Closing Stock 20,000 25,000 Calculate the Acid Test... show full transcript

Worked Solution & Example Answer:The following are figures relating to Laser Ltd - Leaving Cert Business - Question 8 - 2005

Step 1

Calculate the Acid Test Ratio for 2003

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Answer

To calculate the Acid Test Ratio for 2003, use the formula:

$\text{Acid Test Ratio} = \frac{\text{Current Assets} - \text{Closing Stock}}{\text{Current Liabilities}}$

Substituting the values:

$\text{Acid Test Ratio}_{2003} = \frac{85,000 - 25,000}{40,000} = \frac{60,000}{40,000} = 1.5:1$

Step 2

Calculate the Acid Test Ratio for 2004

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Answer

To calculate the Acid Test Ratio for 2004, use the same formula:

$\text{Acid Test Ratio} = \frac{\text{Current Assets} - \text{Closing Stock}}{\text{Current Liabilities}}$

Substituting the values:

$\text{Acid Test Ratio}_{2004} = \frac{90,000 - 20,000}{60,000} = \frac{70,000}{60,000} = 1.17:1$

Step 3

Indicate, by means of a tick (✓), whether the trend is improving or disimproving and give one possible reason for this.

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Answer

The trend is disimproving (✓). A possible reason for this assessment is that while the Acid Test Ratio has decreased, the increase in current liabilities may indicate potential cash flow issues or an increase in debt, which could negatively affect the company's liquidity.

The following are figures relating to Laser Ltd - Leaving Cert Business - Question 8 - 2005

Worked Solution & Example Answer:The following are figures relating to Laser Ltd - Leaving Cert Business - Question 8 - 2005

Calculate the Acid Test Ratio for 2003

Calculate the Acid Test Ratio for 2004

Indicate, by means of a tick (✓), whether the trend is improving or disimproving and give one possible reason for this.

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