What is the difference between the current ratio and the quick ratio?

The current ratio is the proportion (or quotient or fraction) of the amount of current assets divided by the amount of current liabilities.

The quick ratio (or the acid test ratio) is the proportion of 1) only the most liquid current assets to 2) the amount of current liabilities. In other words, the quick ratio assumes that only the following current assets will turn to cash quickly: cash, cash equivalents, short-term marketable securities, and accounts receivable. Hence, the quick ratio does not include inventories, supplies, and prepaid expenses.

To illustrate the difference between the current ratio and the quick ratio, let's assume that a company's balance sheet reports current assets of $60,000 and current liabilities of $40,000. Its current assets include $35,000 of inventory and $1,000 of supplies and prepaid expenses. The company's current ratio is 1.5 to 1 [$60,000 divided by $40,000]. Its quick ratio is 0.6 to 1 [($60,000 minus $36,000) divided by $40,000].



What is the difference between the current ratio and working capital?

The current ratio is the proportion (or quotient or fraction) of the amount of current assets divided by the amount of current liabilities.

Working capital is not a ratio, proportion or quotient, but rather it is an amount. Working capital is the amount remaining after current liabilities are subtracted from current assets.

To illustrate the difference between the current ratio and working capital, let's assume that a company's balance sheet reports current assets of $60,000 and current liabilities of $40,000. The company's current ratio is 1.5 to 1 (or 1.5:1, or simply 1.5) resulting from dividing $60,000 by $40,000. The company's working capital is $20,000 which is the remainder after subtracting $40,000 from $60,000.

What is the difference between adjusting entries and correcting entries?

Generally, adjusting entries are required every accounting period so that a company's financial statements reflect the accrual method of accounting. It is typical for the adjusting entries to be dated as of the last day of the accounting period and to include an income statement account and a balance sheet account.

What is the difference between inventory and the cost of goods sold?

Inventory for a retailer or distributor is the merchandise that was purchased and has not yet been sold to customers. For a manufacturer, inventory consists of raw materials, packaging materials, work-in-process, and the finished goods that are owned and on hand. Inventory is generally valued at its cost. If a business has inventory it is often a major component of its current assets.

What is the difference between FIFO and LIFO?

The difference between FIFO and LIFO results from the order in which changing unit costs are removed from inventory and become the cost of goods sold. When the unit costs have increased, LIFO will result in a larger cost of goods sold and a smaller ending inventory compared with FIFO. If the unit costs are stable, there will be little or no difference between FIFO and LIFO. Also note that the order in which the costs are removed from inventory is independent of the order in which the physical units are removed from inventory.