Prepayment and Quick ratio: Difference between pages

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1. ''Banking''.
''Financial ratio analysis - liquidity ratios.''


The non-contractual early repayment by bank customers of, for example, fixed rate mortgages.
(Current assets <i>less</i> Inventories) / Current liabilities.


The quick ratio gives a very rough indication of the liquidity (or solvency) of the reporting entity.<br />
If the quick ratio were to fall below 1.0, this would indicate that the entity would not be able to meet its current liabilities out of its cash in hand and the proceeds of its other current assets (excluding inventories).


2. ''Accounting''.


An amount paid in advance for a financial benefit, represented by an asset in the organisation's balance sheet.
<b>Example</b><br />
Current assets (excluding inventories) = £3m. <br />
Current liabilities = £4m. <br />


It is a prepaid expense.
The Quick ratio is: <br />
= 3 / 4 <br />
= 0.75.




:<span style="color:#4B0082">'''''Example: Venue hire'''''</span>
The quick ratio is also known as the Acid test or the Acid test ratio.<br />
 
Inventories are sometimes also known as Stock.
:We book a venue for a function.
 
:And pay 50% of the hire fee in advance.
 
 
 
:The 50% paid in advance is an ASSET for us.
 
:We are going to enjoy the use of the venue in future, but it has already been paid for.
 
:So the 50% already paid represents a future economic benefit.
 




== See also ==
== See also ==
* [[Accrual]]
* [[Balance sheet ratio]]
* [[Average effective maturity]]
* [[Current assets]]
* [[Bookkeeping]]
* [[Current liabilities]]
* [[Early Repayment Charge]]
* [[Current ratio]]
* [[Extension risk]]
* [[Inventory]]
* [[Prepaid expense]]
* [[Liquidity]]
* [[Prepayment risk]]
* [[Liquidity ratio]]
* [[Prepayments]]
* [[Stock]]


[[Category:Accounting,_tax_and_regulation]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:Identify_and_assess_risks]]
[[Category:The_business_context]]
[[Category:Manage_risks]]
[[Category:Liquidity_management]]
[[Category:Risk_frameworks]]

Latest revision as of 19:09, 3 February 2019

Financial ratio analysis - liquidity ratios.

(Current assets less Inventories) / Current liabilities.

The quick ratio gives a very rough indication of the liquidity (or solvency) of the reporting entity.
If the quick ratio were to fall below 1.0, this would indicate that the entity would not be able to meet its current liabilities out of its cash in hand and the proceeds of its other current assets (excluding inventories).


Example
Current assets (excluding inventories) = £3m.
Current liabilities = £4m.

The Quick ratio is:
= 3 / 4
= 0.75.


The quick ratio is also known as the Acid test or the Acid test ratio.
Inventories are sometimes also known as Stock.


See also

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