acid-test ratio
When you work out the current ratio, you work out your assets, or how much you have, including stock, for every pound you owe. However, stock is the least liquid asset. What if you need money quickly and you can’t sell the stock? The acid test ratio shows whether there are enough assets without the stock to cover the current liabilities. The ideal acid test ratio is 2:1. This is how you work out the acid test ratio:
Current assets less stock : Current liabilities
Dividing the current assets minus stock by the current liabilities will help you to convert the current ratio to a form that is easier to understand. For example, you can convert 4020:1159 to 3.5:1 (4020 ÷ 1159 = 3.5). This means that the business has £3.50 for every £1 it owes.
Your task
Use this formula to calculate Cadbury’s acid-test ratio in 2005 and in 2006 in the space provided in the spreadsheet. Your answer will turn green if it is correct and red if it is not.
