Q.From the Balance Sheet given in Practical Problem 3 above, compute the Debt-Equity Ratio and the Proprietary Ratio.

An asset which can be converted into cash immediately is a Liquid asset (also called a Quick asset).

While studying liquidity, current assets are split into:

• Liquid / quick assets — cash, bank balance, marketable securities, debtors and bills receivable, which can be realised in cash immediately or very quickly. …

Pick out only the current assets — Debtors, Stock and Loose tools — and ignore the liabilities in the list. Current Assets = 60,000 + 30,000 + 10,000 = ₹1,00,000.

Method: Current Assets are assets expected to be converted into cash within one year. Creditors, Bills payable and Bank overdraft are current liabilities, so they are excluded.

Creditors focus on Liquidity, because it shows whether the firm can settle amounts owed to them on time.

Financial statement analysis serves many users, and each looks for a different thing:

• Creditors / suppliers — supply goods on credit, so their prime concern is the firm's short-term solvency (liquidity): can it pay bills when due? This is judged by liquidity ratios such as Current Ratio and Quick Ratio.
• Shareholders / owners — interested mainly in profits and return on capital. …