Question & Answer: Shannon Co. reported the following ratios for the most recent two year period: In regards to liquidity, Shannon's position: Improved…..

In regards to liquidity, Shannon’s position has improved comparatively in 2016 with respect to 2015. Liquidity is determined on the basis of Acid test ratio (Quick ratio) and Current ratio and since both the ratios have improved in 2016 compared to 2015 Acid test ratio=Cash + Accounts receivable + Short term investment/ Current liabilities Short term investment include marketable securities that can be liquidated quickly. Current ratio=Current assets/Current liabilities Note: The Acid test ratio is the conservative version of Current ratio. Although both are similar the Acid test ratio provides a more rigorous assessment of company’s ability to pay it’s current liabilities. It does this by eliminating all but the most liquid of current assets from consideration. Inventory is the most notable exclusion as it cannot be easily converted into cash. Acid test ratio has clearly improved from 0.75 to 1.05 and Current ratio from 1.95 to 2.13