Q.What is the significance of the Current Ratio? Why is 2:1 conventionally considered an ideal ratio?

Quick ratio = (Current assets − Inventory) ÷ Current liabilities = 80,000 ÷ 40,000 = 2 : 1.

In the TN HSC Class-12 Accountancy syllabus (Ratio Analysis), the quick (liquid / acid-test) ratio measures the firm's ability to meet current liabilities using its most liquid assets, excluding inventory and prepaid expenses which cannot be converted to cash immediately.

Given: Current liabilities = ₹40,000; Current assets = ₹1,00,000; Inventory = ₹20,000.

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Liquidity is tested by the Quick ratio (i) and the Current ratio (iv) — option (d).

Liquidity ratios measure a firm's ability to pay its short-term liabilities as they fall due:

• Current ratio = Current Assets ÷ Current Liabilities (ideal 2:1).
• Quick (liquid) ratio = Quick Assets ÷ Current Liabilities (ideal 1:1), where quick assets exclude stock and prepaid expenses. …

Current assets minus inventory and prepaid expenses are the quick (liquid) assets used to test immediate solvency — option (c).

Current assets include cash, bank, debtors, bills receivable, short-term investments, inventory and prepaid expenses. Of these:

• Inventory (closing stock) is excluded because it must first be sold before it becomes cash, so it is not readily liquid.
• Prepaid expenses are excluded because they are already-spent amounts that will be received back as a service, not as cash. …

Assets convertible into cash within a year/operating cycle are Current assets — option (c).

Current assets are those expected to be realised in cash, sold or consumed within one year or within the firm's operating cycle — for example cash, debtors, bills receivable, inventory and prepaid expenses. They are central to liquidity ratios such as the current ratio.

The other options describe long-lived or non-current items: …