liquidity ratios to measure the entity's ability to meet its financial obligations in the short term, that is, they are measures of the company's liquidity. Short-term here refers to a period of 12 months or less. Two of the most important is liquidity ratios Current ratio and quick ratio. Wording of the current ratio, or the working capital ratio, is the following:
Current ratio = current / current liabilities assets
quick ratio, or acid test ratio, is represented as follows:
quick ratio = [Current Assets - Inventories - Prepaid Expenses] / [Current Liabilities - Bank Overdraft]
basically, these percentages relate to the assets and liabilities that come in the context of activities day after day. By definition, the quick ratio takes into account a more rapid monetization of assets, temporary and liabilities with short-term maturities.
consensus, about whether or should not be included in overdraft accounts in liquidity ratios, still divided. Overdraft is usually a short-term arrangement of loans to cover any temporary shortfall of cash resources. Interest shall be loaded only on amounts drawn against the limit. Often accumulate such interest on very short periods, usually a variable. As the company has to borrow for the allocation of resources to monitor the regular interest rate, and the renegotiation of the terms of borrowing, they are drawn to open sparingly, only when necessary. In addition, you can cancel the overdraft facility at any time. These factors highlight the fundamental nature of the short-term from this type of funding. Therefore, most analysts prefer to include it as part of current liabilities as of the current ratio. However, some take a different view.
are drawnoverdraft lines of credit against which typically extend for periods of more than one year, and often renewed completion. In addition, most organizations maintain these facilities to be used when needed. More or less, and these instruments become a permanent source of funding. As a result, a common practice, the overdraft is not callable upon request, to add an additional degree of permanence. This explains why, in the form of a convention, they are excluded from the Quick Ratio account.
final decision, to include or exclude, will depend on the details of the case at hand, for example, if the facility is credited to mature in the short term with no there is no intention of the organization to renew it, it may be wise to include an overdraft in the calculations. Similarly, if the overdraft is calling upon request, it is definitely part of the current ratio, and subject to other details, it may also form part of the Quick Ratio.
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