Financial Accounting · Analysis of financial statements

Liquidity and Working Capital Ratios for ACCA Financial Accounting

Updated 11 October 2026 · Fact-checked

Liquidity and working capital ratios show whether a business can pay its short-term debts. The current ratio is current assets ÷ current liabilities. The quick ratio removes inventory. Inventory, receivables and payables days show how long cash is tied up. Pick the formula, find the figures, calculate, then comment.

Understand Liquidity and Working Capital Ratios

Liquidity is a business's ability to pay its debts as they fall due. A profitable business can still fail if it runs out of cash. Liquidity ratios test this by comparing short-term assets with short-term obligations.

The current ratio compares all current assets with all current liabilities. A result of 2 means the business has $2 of current assets for every $1 it owes within a year. The quick ratio (also called the acid test) leaves out inventory, because inventory can be slow to turn into cash. It is a stricter test.

The working capital cycle is the time between paying suppliers and collecting cash from customers. Three ratios describe it. Inventory days show how long stock is held before sale. Receivables days show how long customers take to pay. Payables days show how long the business takes to pay suppliers.

Shorter inventory and receivables days are usually good, because cash comes back sooner. Longer payables days help cash, but if they stretch too far you may damage supplier relations or lose discounts. There is no single correct ratio. Rules of thumb such as 2:1 for the current ratio and 1:1 for the quick ratio are only guides. A supermarket sells for cash and can run a current ratio well below 1 safely.

A ratio means little alone. You compare it with prior years, with similar businesses or with the industry. In the exam, you calculate first, then say what the figure suggests.

Key formulas to remember

Current ratio: Current assets ÷ Current liabilities; Shown as a ratio, e.g. 1.8 : 1, or as a number such as 1.8 times.
Quick ratio (acid test): (Current assets − Inventory) ÷ Current liabilities; Current assets are inventory, trade receivables, cash and similar items.
Inventory days: Inventory ÷ Cost of sales × 365; Use cost of sales, not revenue. Some questions use average inventory, so read the wording. Some use 360 days or months if told.
Receivables days: Trade receivables ÷ Revenue × 365; Use credit sales if given. Otherwise use total revenue.
Payables days: Trade payables ÷ Cost of sales × 365; Use credit purchases if given. Otherwise use cost of sales.
Working capital (cash) cycle: Inventory days + Receivables days − Payables days; A shorter cycle means cash is tied up for less time.

How to solve Liquidity and Working Capital Ratios questions

Use this method for any liquidity or working capital ratio question.

1Read exactly which ratio is asked and note the day basis (365 or other) and rounding instruction.
2Pick the correct formula and note which income statement figure it needs: revenue or cost of sales.
3Pull the figures from the right place: current items from the statement of financial position, revenue and cost of sales from the statement of profit or loss.
4Check the question for traps, such as credit sales only, average balances, or items to exclude from current assets.
5Calculate and round as instructed. Check the result is sensible, e.g. days between 0 and 365 for normal businesses.
6If a comment is asked for, state the direction of change or comparison, then give a likely reason, e.g. slower customer collection.
7For multiple response questions, test every option against your calculated figures before selecting.

Quickest way: Match the ratio to its denominator

When to use it: Use this under time pressure in Section A objective questions.

Remember the pairing: receivables with revenue; inventory and payables with cost of sales.
Write the formula in one line before touching the figures.
For quick ratio, subtract inventory from current assets first, then divide.
Calculate the days ratio as a fraction of 365, then multiply last to keep accuracy.
Compare the answer against the options. Eliminate any that use the wrong denominator.

Common mistakes in Liquidity and Working Capital Ratios

Using revenue to calculate inventory days or payables days.
Students remember that revenue is used for receivables and apply it everywhere.
Fix: Inventory is held at cost, so use cost of sales. Payables relate to purchases, so use cost of sales unless purchases are given.
Leaving inventory in the quick ratio.
Students rush and reuse the current ratio numerator.
Fix: Always write current assets − inventory as the first line of the working.
Using total receivables including other receivables and prepayments.
Students take the statement of financial position line without reading it.
Fix: Use trade receivables only when the question separates them.
Saying a higher current ratio is always better.
Students link higher with safer.
Fix: A very high ratio may mean idle cash, excess inventory or slow-paying customers. Comment on context.
Interpreting longer payables days as purely good.
It improves cash, so students stop there.
Fix: Mention the risk too: supplier loss of trust, lost discounts, or inability to pay on time.
Forgetting to multiply by 365 and giving a fraction.
Students confuse turnover ratios with day ratios.
Fix: Days answers are in days. If your answer is below 1, you have not multiplied by 365.

Worked examples

Example 1

A company has inventory of $48,000, trade receivables of $62,000, cash of $10,000 and current liabilities of $75,000. Calculate the current ratio and quick ratio to two decimal places.

Show the solution

Current assets = 48,000 + 62,000 + 10,000 = $120,000.
Current ratio = 120,000 ÷ 75,000 = 1.60.
Quick assets = 120,000 − 48,000 = $72,000.
Quick ratio = 72,000 ÷ 75,000 = 0.96.

Answer: Current ratio 1.60 : 1; quick ratio 0.96 : 1. The quick ratio is below 1, so the company relies on selling inventory to meet short-term debts in full.

Example 2

A company has revenue of $730,000, cost of sales of $438,000, inventory of $60,000, trade receivables of $80,000 and trade payables of $54,000. Calculate inventory days, receivables days, payables days and the working capital cycle, using 365 days and rounding to the nearest day.

Show the solution

Inventory days = 60,000 ÷ 438,000 × 365 = 50 days.
Receivables days = 80,000 ÷ 730,000 × 365 = 40 days.
Payables days = 54,000 ÷ 438,000 × 365 = 45 days.
Cycle = 50 + 40 − 45 = 45 days.

Answer: Inventory 50 days, receivables 40 days, payables 45 days, working capital cycle 45 days.

Exam tips

Write the formula first, then substitute. Even in number entry questions, this prevents denominator errors.
Check the rounding and units asked for: days, a ratio to two decimals, or a percentage.
For multiple response questions, calculate each statement's ratio rather than guessing from trends.
In Section B comments, give the figure, the comparison, and one plausible reason in a single sentence each.
Watch for questions that give opening and closing balances. Only average them if the question says so.

Practice questions from Analysis of financial statements

Liquidity and Working Capital Ratios in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Liquidity and Working Capital Ratios: frequently asked questions

What is the difference between the current ratio and the quick ratio?

The current ratio uses all current assets. The quick ratio removes inventory first. The quick ratio is stricter because inventory may take time to sell and may not realise its carrying amount.

How do I calculate receivables days in ACCA FA?

Divide trade receivables by revenue and multiply by 365. If the question gives credit sales, use that instead of total revenue. Round as instructed.

Which figure do I use for inventory holding period?

Use closing inventory divided by cost of sales, multiplied by 365. Use average inventory only if the question tells you to. Do not use revenue.

What is a good current ratio?

There is no fixed good figure. A figure around 1.5 to 2 is often quoted as a guide, but the right level depends on the industry and the business. Compare with prior years and similar firms.