Question

Need to know how to find current ratio, acid-test ratio, and gross margin ratio.

Answer 1

• For Current Ratio and Acid Test Ratio, you need to look at the Asset side of the Balance Sheet, particularly on Current Assets & Current Liabilities section.
• Current Ratio is calculated by dividing Current Assets by Current Liabilities.

Current Ratio = Current Assets / Current Liabilities

• For Acid Test Ratio, you need to exclude Inventory balance and Prepaid Expense balance from total current Assets. Then divide this amount by total current liabilities.

Acid Test Ratio = (Current Assets – Inventories – Prepaid Expenses) / Current Liabilities.

• For calculating Gross Margin ratio, you need to go through Income Statement.

Sales – Cost of Goods Sold = Gross Profits.

Gross Profit margin = (Gross Profits / Net Sales) x 100

This is calculated in percentage and is represented as a ‘percentage of sale’.