Question

why is prepaid expense included while calculating current ratio and excluded while calculating liquid ratio

Answer 1

Dear Student

We know that current ratio means current assets divided by current liabilities where as Liquid ratio means Liquid assets (i.e Assets that can be converted into cash in a very short period of time or say very quickly) divided by current liabilities,

Now prepaid expense is considered as a current asset but not as liquid asset because it cant be converted into cash quickly , Therefore it can't be used in calculation of Liquid ratio .


Regards