Accountancy · Ch 9 — Ratio Analysis
Liquidity Ratios
Liquidity Ratios
Liquidity Ratios measure a firm's ability to meet its short-term (current) obligations as they fall due, using its current assets.
Current Ratio = Current Assets ÷ Current Liabilities
Measures the overall short-term solvency of the firm; an ideal ratio is conventionally taken as 2 : 1, meaning ₹2 of current assets for every ₹1 of current liabilities.
Quick (Acid-Test) Ratio = Quick Assets ÷ Current Liabilities, where Quick Assets = Current Assets − Inventories − Prepaid Expenses
Measures immediate short-term solvency, excluding inventory (which may take time to convert to cash) and prepaid expenses (which do not convert to cash at all); an ideal ratio is conventionally taken as 1 : 1.
Worked illustration (using the illustrative data of Section 1).
Current Assets = 2,00,000 + 1,50,000 + 1,00,000 + 50,000 = ₹5,00,000. Current Liabilities = ₹2,00,000.
Current Ratio = 5,00,000 ÷ 2,00,000 = 2.5 : 1
Quick Assets = Current Assets − Inventories − Prepaid Expenses = 5,00,000 − 2,00,000 − 50,000 = ₹2,50,000. …
Current Assets divided by Current Liabilities; measures a firm's overall ability to meet short-term obligations, with 2:1 convent …
Quick Assets (Current Assets minus Inventories and Prepaid Expenses) divided by Current Liabilities; measures immediate liquidity, with 1:1 conv …