Current Assets x Stock รท Current Liabilities (x100)
Guideline: Own Policy
Description:
The Acid Test for the motor industry is very subjective as the valuations of our stocks are at the mercy of market forces and people's opinions. For instance, if your used vehicle stock is stated as R250,364 how much could you get for it if you had to liquidate it today?
The same can be said for your Parts stock although most manufacturers have a valuation clause within their franchise agreements, typically, this is around 15% below wholesale price of current stock; this usually excludes Obsolete Stock.
Debtors are also subject to scrutiny, how much of your debtors would you be able to recover? You can of course sell your debtors to a factoring company, but this will incur additional costs, usually around 20% of their value.
Example:
Discussion:
This Acid Test of many companies asks this question. If we were to liquidate our Current Assets, would we be able to payoff our short-term debt?
There are many different calculations for the Acid Test and every company differs depending upon their own particular requirements. Always check the formula for this one to be sure that you know what is being measured.