Financial Accounting · Ratios

Liquidity Ratios: Current Ratio and Quick Ratio for ACCA FA

Updated 11 October 2026 · Fact-checked

Liquidity ratios test whether a business can pay its debts due within one year. The current ratio is current assets ÷ current liabilities. The quick ratio is (current assets − inventory) ÷ current liabilities. Calculate both, compare them with prior years or a benchmark, and comment on what the movement means.

Understand Liquidity Ratios

Liquidity is a business's ability to pay its short-term debts as they fall due. A profitable business can still fail if it runs out of cash. Liquidity ratios warn you about this risk.

The current ratio compares all current assets with all current liabilities. Current assets are inventory, trade receivables, and cash. Current liabilities are amounts due within 12 months, such as trade payables, tax payable and a bank overdraft. A ratio above 1 means current assets cover current liabilities.

The quick ratio (also called the acid test) removes inventory from current assets. Inventory may take time to sell and may not sell at its carrying amount. So the quick ratio is a harsher test of whether the business can pay its debts using cash and receivables.

There is no ideal figure that fits every business. A ratio of 2:1 for the current ratio and 1:1 for the quick ratio are old rules of thumb, not rules. A supermarket sells for cash and has fast-moving inventory. It can operate safely with a current ratio below 1. A manufacturer with slow inventory may need a higher figure.

When you comment, do not stop at "it went up" or "it went down". A higher ratio is not always good. It can mean too much cash sitting idle, high inventory, or slow-paying customers. A lower ratio is not always bad. It can mean the business is using its working capital efficiently, but it can also signal trouble. Link your comment to the cause.

Key formulas to remember

Current ratio: Current ratio = Current assets ÷ Current liabilities; Shown as a ratio, e.g. 1.5 : 1, or as a number of times. Use the closing statement of financial position figures.
Quick ratio (acid test): Quick ratio = (Current assets − Inventory) ÷ Current liabilities; Equals (receivables + cash and bank) ÷ current liabilities when those are the only other current assets.
Reading the result: Ratio above 1 : current assets exceed current liabilities; below 1 : they do not; Treat 2:1 and 1:1 as rough guides only. Always compare with the prior year, the industry and the nature of the business.

How to solve Liquidity Ratios questions

Use this method for any liquidity question, whether it asks for a calculation, a comment or both.

1Read the question and note which ratio is asked for, and which year or years.
2From the statement of financial position, list current assets: inventory, receivables, cash. Then list current liabilities, including any overdraft and current tax.
3Check that you use only current items. Leave out non-current assets and loans due after more than one year.
4Calculate the current ratio. Then deduct inventory and calculate the quick ratio.
5Round as the question instructs, usually to two decimal places, and show the answer as a ratio or number of times.
6If asked to comment, state the direction of change, then give the likely cause, e.g. inventory build-up, a larger overdraft, or slower receivable collection.
7Give a conclusion: is short-term solvency improving or weakening, and is that consistent with the type of business?

Quickest way: Three-number shortcut

When to use it: Use this in Section A number-entry or multiple-choice questions where the statement of financial position figures are given.

Write down three numbers: inventory, total current assets, total current liabilities.
Divide current assets by current liabilities for the current ratio.
Subtract inventory from current assets, then divide by current liabilities for the quick ratio.
Sense-check: the quick ratio must always be lower than the current ratio if inventory is above zero.
Check the rounding instruction before you type the answer.

Common mistakes in Liquidity Ratios

Leaving out the bank overdraft from current liabilities.
Students see the word bank and treat it as an asset.
Fix: An overdraft is a liability repayable on demand. Include it in current liabilities.
Deducting receivables or cash instead of inventory in the quick ratio.
Students mix up which current assets are quick.
Fix: Only inventory is removed. Receivables and cash stay in.
Including non-current liabilities such as a long-term loan in the denominator.
Students use total liabilities.
Fix: Use only liabilities due within one year, shown under current liabilities.
Saying a higher current ratio is always better.
Students link a high ratio with safety.
Fix: Explain the cause. A high ratio may reflect excess inventory, idle cash or slow-paying customers.
Applying 2:1 and 1:1 as fixed pass marks.
These figures are repeated in textbooks as rules.
Fix: Describe them as rough guides. Compare with prior year, industry and business type.
Dividing the other way round.
Rushing under time pressure.
Fix: Assets go on top and liabilities on the bottom. A healthy business usually gives a figure above 1.

Worked examples

Example 1

At 31 December, a company has inventory of $48,000, trade receivables of $36,000 and cash of $6,000. Trade payables are $50,000 and a bank overdraft is $10,000. Calculate the current ratio and quick ratio, to two decimal places.

Show the solution

Current assets = 48,000 + 36,000 + 6,000 = $90,000.
Current liabilities = 50,000 + 10,000 = $60,000.
Current ratio = 90,000 ÷ 60,000 = 1.50.
Quick assets = 90,000 − 48,000 = $42,000.
Quick ratio = 42,000 ÷ 60,000 = 0.70.

Answer: Current ratio 1.50 : 1; quick ratio 0.70 : 1.

Example 2

Last year, current assets were $120,000 (inventory $60,000) and current liabilities were $80,000. This year, current assets are $150,000 (inventory $100,000) and current liabilities are $75,000. Calculate both ratios for each year and comment.

Show the solution

Last year current ratio = 120,000 ÷ 80,000 = 1.50.
Last year quick ratio = (120,000 − 60,000) ÷ 80,000 = 60,000 ÷ 80,000 = 0.75.
This year current ratio = 150,000 ÷ 75,000 = 2.00.
This year quick ratio = (150,000 − 100,000) ÷ 75,000 = 50,000 ÷ 75,000 = 0.67 (to two decimal places).
Comment: the current ratio looks stronger, but the quick ratio has fallen.
The improvement is due to higher inventory, which rose from $60,000 to $100,000. Inventory is less liquid than cash or receivables.

Answer: Current ratio rose from 1.50 to 2.00 and quick ratio fell from 0.75 to 0.67. The apparent improvement is driven by inventory build-up, so short-term liquidity has not truly improved. The business should check whether the inventory will sell.

Exam tips

In Section A, read whether the question wants the current ratio or the quick ratio. The two are easy to swap under time pressure.
For number entry, follow the stated rounding and format exactly, such as two decimal places.
In Section B comment questions, always give a cause and a conclusion, not only the direction of change.
If the current ratio rises and the quick ratio falls, look at inventory first.
Check for an overdraft and for current tax payable. Both belong in current liabilities.

Practice questions from Ratios

Liquidity 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 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 a stricter test because inventory can be slow to turn into cash.

What is a good current ratio for ACCA FA?

There is no single good figure. A common guide is around 2:1, but it depends on the industry. Always compare with prior years and similar businesses before you comment.

Why does the quick ratio exclude inventory?

Inventory must be sold, and then the customer must pay, before it becomes cash. It may also sell for less than its carrying amount. So it is the least liquid current asset.

Is a very high current ratio a problem?

It can be. It may mean excess inventory, idle cash or slow collection from customers. These tie up funds that could earn a return elsewhere.