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I want to measure the effect of different Value Added Tax (VAT) policies to the liquidity of a business. I am using a simple liquidity measure, the cash ratio. There are three VAT policies which I wish to compare:

Policy 1: Base case

A VAT statement is submitted quarterly where we declare either how much VAT we have to pay or how much we claim as a return (the usual case).

Policy 2: Split payment

We pay VAT directly to the tax authority when we purchase goods and submit the VAT statement quarterly in order to claim back any VAT. Keep in mind that the seller doesn't collect any VAT when selling goods, they only pay it VAT when they purchase.

Policy 3: Partial split payment

We pay 50% of the VAT directly to the tax authority when we purchase goods and the remaining 50% to the seller. We submit the VAT statement quarterly where we declare how much VAT we have to pay or how much we claim as a return.

The research question is, how will liquidity be affected if we switch the collection policy from (1) to (2) or (3). The formula for cash ratio is: Cash ratio = Cash & cash equivalents/Current liabilities.

So my question is, how would I assess the cash ratio in all scenarios? I consider a fixed value for liabilities which is the same in all policies, except for VAT taxes. I am thinking about the following:

Policy 1: Base case

Cash + Cash equivalents = Gross value of goods sold - Gross value of items bought

Current liabilities = Fixed liabilities + VAT collected

Policy 2: Split payment

Cash + Cash equivalents = Net value of goods sold - Gross value of items purchased

Current liabilities = Fixed liabilities

Policy 3: Partial split payment

Cash + Cash equivalents = Net value of goods sold - Gross value of items + 50% of VAT for our sales

Current liabilities = Fixed liabilities + 50% of VAT for our sales

I would like to know if I am approaching this the correct way as I am not coming from an accounting background. Thanks!

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