Liquidity ratio measures the ability of a company to pay its current and long term liabilities. It’s the easiest way to know how much fund a company can raise and how much asset can convert into cash?
Liquidity ratio can be categorized into various types such as: Acid ratio, Cash ratio & current ration.
Acid Ratio: Acid ratio also called as quick ratio. Acid ration defines the ability of a company to meet its current and short term obligations with the use of its most liquid assets.
Calculation method: Cash & cash equivalents + Accounts receivable + Short term investments / Current liabilities
It’s the period for which financial statements prepared of an entity. One accounting period consists of 12 months. This time period can be from January to December (calendar year) or April to March (Fiscal Year).
Accounting period varies according to type of business. For example, if a business set forth on February 12 then its first accounting period would be from February 12 to February 28/ 29.
Again, if a business shut down on March 25 then its final accounting period would be from March 1 to March 25. Accounting period pertain to only income and cash flow statements as balance sheet prepared on a specific date.