From the following information calculate: (i) Gross Profit Ratio (ii) Inventory Turnover Ratio (iii) Current Ratio (iv) Liquid Ratio (v) Net Profit Ratio (vi) Working Capital Ratio. | Particulars | Amount (₹) | | --- | --- | | Revenue from Operations | 25,20,000 | | Net Profit | 3,60,000 | | Cost of Revenue from Operations | 19,20,000 | | Long-term Debts | 9,00,000 | | Trade Payables | 2,00,000 | | Average Inventory | 8,00,000 | | Liquid Assets | 7,60,000 | | Fixed Assets | 14,40,000 | | Current Liabilities | 6,00,000 | | Net Profit before Interest and Tax | 8,00,000 |

From the following information calculate: (i) Gross Profit Ratio (ii) Inventory Turnover Ratio (iii) Current R

Numerical Questions · Q11

From the following information calculate: (i) Gross Profit Ratio (ii) Inventory Turnover Ratio (iii) Current Ratio (iv) Liquid Ratio (v) Net Profit Ratio (vi) Working Capital Ratio.

Particulars	Amount (₹)
Revenue from Operations	25,20,000
Net Profit	3,60,000
Cost of Revenue from Operations	19,20,000
Long-term Debts	9,00,000
Trade Payables	2,00,000
Average Inventory	8,00,000
Liquid Assets	7,60,000
Fixed Assets	14,40,000
Current Liabilities	6,00,000
Net Profit before Interest and Tax	8,00,000

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Concept understanding — Liquidity Ratio Analysis

Liquidity Ratio Analysis – A First Look

Think of your own pocket money. You get ₹500 at the start of the month. You know you'll need to pay ₹200 for a bus pass, ₹150 for stationery, and ₹100 for a friend's birthday gift. That's ₹450 of definite expenses. You have ₹500 cash in hand. You can easily cover those payments. That's liquidity – your ability to meet short-term obligations as they fall due.

Now imagine you have a ₹10,000 fixed deposit that matures in two years, but you need ₹500 today. You can't break the FD easily without a penalty. That asset is not liquid enough for today's need. Liquidity is about timing – having cash or near-cash when the bill arrives.

The Precise Meaning in Accountancy

In a business, liquidity means the firm's ability to pay its current liabilities (debts due within one year) using its current assets (assets that can be converted into cash within one year). The two most important ratios from NCERT Class 12 (Part B, Chapter 5 – Accounting Ratios) are:

Current Ratio = Current Assets / Current Liabilities
Quick Ratio (Acid Test Ratio) = Quick Assets / Current Liabilities

Where:

Current Assets include: Cash, Bank, Debtors, Bills Receivable, Inventory, Prepaid Expenses, Short-term Investments.
Current Liabilities include: Creditors, Bills Payable, Outstanding Expenses, Short-term Loans, Bank Overdraft.
Quick Assets = Current Assets – Inventory – Prepaid Expenses (because inventory takes time to sell, and prepaid expenses cannot be converted to cash).

Important

The ideal current ratio is 2:1 (₹2 of current assets for every ₹1 of current liability). The ideal quick ratio is 1:1. These are benchmarks, not rigid rules – a trading firm with fast-moving inventory can survive with a lower current ratio.

Why It Matters

A business that cannot pay its short-term debts is technically insolvent – even if it owns huge factories. Creditors, banks, and suppliers check these ratios before giving credit. A very high ratio (say 5:1) may mean idle cash or poor asset utilisation. A very low ratio (say 0.8:1) signals danger – the firm may default.

Watch out

A high current ratio is not always good. If it comes from slow-moving inventory or old debtors, the firm may still struggle to pay cash. That's why the quick ratio is a stricter test.

Accounting Treatment – No Direct Journal Entry

Liquidity ratios are not recorded in the books of accounts. They are calculated from the Balance Sheet for analysis. There is no debit or credit entry for a ratio. The treatment is purely analytical:

You take the Balance Sheet (prepared under Schedule III of Companies Act, 2013).
Identify current assets and current liabilities from the prescribed format.
Compute the ratios.

However, the components of these ratios do have accounting entries. For example, when you buy goods on credit:

Debit Purchases A/c
Credit Creditors A/c

This increases inventory (current asset) and creditors (current liability), affecting the current ratio. But the ratio itself is never journalised.

Format from NCERT – Balance Sheet Extract (Schedule III)

Below is the relevant part of the Balance Sheet format used to compute liquidity ratios. Only the current portions are shown.

Particulars	Note No.	Amount (₹)
ASSETS
1. Non-current Assets
(a) Property, Plant & Equipment	1	xxx
(b) Intangible Assets	2	xxx
2. Current Assets
(a) Inventories	3	xxx
(b) Trade Receivables	4	xxx
(c) Cash & Cash Equivalents	5	xxx
(d) Short-term Loans & Advances	6	xxx
(e) Other Current Assets	7	xxx
Total Assets		xxxx
EQUITY & LIABILITIES
1. Shareholders' Funds
(a) Share Capital	8	xxx

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Gross Profit Ratio = 23.81%; Inventory Turnover Ratio = 2.4 times; Current Ratio = 2.6:1; Liquid Ratio = 1.27:1; Net Profit Ratio = 14.29%; Working Capital Ratio = 2.625 times.

Let’s walk through each ratio step by step. The key to solving this is to first identify which figures are directly given and which need to be derived from the relationships between them. Every ratio is a fraction — numerator over denominator — and the trick is to ensure both are correctly defined per accounting standards.

Gross Profit Ratio measures how much profit is earned on every rupee of sales after covering the cost of goods sold. The formula is:

Gross Profit Ratio = (Gross Profit / Revenue from Operations) × 100

Gross Profit is not directly given, but we have Revenue from Operations (₹25,20,000) and Cost of Revenue from Operations (₹19,20,000). Gross Profit = Revenue – Cost = 25,20,000 – 19,20,000 = ₹6,00,000.

So, Gross Profit Ratio = (6,00,000 / 25,20,000) × 100 = 23.8095…% ≈ 23.81%.

Inventory Turnover Ratio tells us how efficiently inventory is being sold. Formula:

Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory

Cost of Revenue from Operations is ₹19,20,000 and Average Inventory is ₹8,00,000. So:

19,20,000 / 8,00,000 = 2.4 times.

This means the inventory is completely sold and replaced 2.4 times during the period.

Current Ratio compares current assets to current liabilities. We are given Current Liabilities = ₹6,00,000. But Current Assets are not directly given. However, we know Liquid Assets = ₹7,60,000 and Average Inventory = ₹8,00,000. Liquid Assets are current assets minus inventory and prepaid expenses. So:

Current Assets = Liquid Assets + Average Inventory = 7,60,000 + 8,00,000 = ₹15,60,000.

Therefore, Current Ratio = 15,60,000 / 6,00,000 = 2.6 : 1.

Watch out

Do not confuse Liquid Assets with Current Assets. Liquid Assets exclude inventory. Using Liquid Assets directly in the Current Ratio would give a wrong answer.

Liquid Ratio (also called Quick Ratio or Acid Test Ratio) measures the ability to pay short-term obligations using the most liquid assets. Formula:

Liquid Ratio = Liquid Assets / Current Liabilities

Liquid Assets = ₹7,60,000, Current Liabilities = ₹6,00,000. So:

7,60,000 / 6,00,000 = 1.2666… ≈ 1.27 : 1.

Net Profit Ratio shows the percentage of profit left after all expenses (including interest and tax) relative to revenue. Formula:

Net Profit Ratio = (Net Profit / Revenue from Operations) × 100

Net Profit is given as ₹3,60,000 and Revenue from Operations is ₹25,20,000. So:

(3,60,000 / 25,20,000) × 100 = 14.2857…% ≈ 14.29%.

Working Capital Ratio (also called Working Capital Turnover Ratio) measures how efficiently working capital is used to generate revenue. Formula:

Working Capital Ratio = Revenue from Operations / Working Capital

Working Capital = Current Assets – Current Liabilities = 15,60,000 – 6,00,000 = ₹9,60,000.

So, Working Capital Ratio = 25,20,000 / 9,60,000 = 2.625 times. …

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