Scribd
Upload
23 views24 pages

Liquidity Ratios - XII

Main Topic-Accounting Ratio Sub topic- Liquidity Ratio

Uploaded by

Shweta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
23 views24 pages

Liquidity Ratios - XII

Main Topic-Accounting Ratio Sub topic- Liquidity Ratio

Uploaded by

Shweta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 24

RATIO ANALYSIS

CLASS XII
RATIO ANALYSIS
Relationship between two figures, expressed in arithmetical terms is called a “ratio”.
A Ratio is simply one number expressed in terms of another. It is found by dividing one number
into the other.
Expressed in:
1. Proportion or Pure or Simple ratio : eg: 2:1
2. Rate or so many times : eg: 5 times
3. Percentage : eg: 20%
4. Fraction : eg: net profit one-fifth of capital
Cross Sectional analysis: it involves the comparison of a firm’s ratio
with that of some selected firms in the same industry
Time series analysis: it means comparison of a firms present ratio with
its past ratios
CLASSIFICATION OF RATIOS
A. LIQUIDITY RATIOS
B. SOLVENCY RATIOS
C. ACTIVITY RATIOS
D. PROFITABILITY RATIOS
1.CURRENT RATIOS OR WORKING CAPITAL RATIO
FORMULAE : CURRENT ASSETS
-------------------------
CURRENT LIABILITIES
CURRENT ASSETS: Current investments
Inventories
Trade receivables
Cash and cash equivalents
Short term loans and advances
Other current assets(prepaid expenses, accrued income, advance tax)

LIQUIDITY RATIOS/ SHORT TERM SOLVENCY RATIOS


NB- Current assets are the assets which are likely to be converted into
cash or cash equivalents with in 12 months from the date of Balance
sheet or within the period of operating cycle.

LIQUIDITY RATIOS/SHORT TERM SOLVENCY RATIOS


ITEMS EXCLUDED FROM CURRENT ASSETS: 1.loose tools, stores and spares
2.provision for doubtful debts

CURRENT LIABILITIES : Short term borrowings


Trade payables
Short term provisions
Other current liabilities (current maturities of long term debts, interest accrued
on borrowings, income received in advance, outstanding expenses, unclaimed dividend, calls in advance )
According to accounting
principles , a current ratio of 2:1
is supposed to be an ideal ratio
Quick ratio indicates whether the firm is in a position to pay its current liabilities within a
month or immediately .
Formulae : Liquid Assets
---------------------
Current Liabilities
Liquid assets: Current Assets – inventories –prepaid expenses and advance tax
An ideal quick ratio is 1:1

QUICK RATIO OR ACID TEST RATIO OR LIQUID RATIO


₹
Trade Investments 2,50,000
EXERCISES
Marketable Securities 40,000
Tangible Fixed Assets 6,00,000 Following
Intangible Assets (Goodwill) 1,00,000 particulars are
given to you:
Trade Receivables 2,00,000
Less : Provision for Doubtful Debts 20,000 1,80,000
Cash and Bank Balance 80,000
Trade Payables 1,20,000
Rent Payable 10,000
Dividend Payable 30,000
Inventories 3,90,000
Long term Borrowings (8% Debentures) 2,80,000 Calculate the
Liquidity Ratios
Short term Borrowings (Bank Overdraft) 25,000 and Comment upon
Short term Provisions : the short-term
Provision for Tax 55,000 financial position of
Income Tax Paid in Advance 30,000 the company.
SOLUTION:

Liquidity Ratios include the following two ratios:


(a) Current Ratio, and (b) QuickRatio
(a) Current Ratio = Current Assets
Current Liabilities

Current Assets = Marketable Securities + Trade Receivables* + Cash &


Balance + + Inventories + Income Tax Paid in
Advance
= ₹40,000 + ₹1,80,000 + ₹ 80,000 + ₹ 3,90,000 +
₹30,000
= ₹7,20,000

Current Liabilities = Trade Payables + Rent Payable + Dividend Payable +


Bank Overdraft + Provision for Tax
= ₹1.20,000 + ₹10,000 + ₹30,000 + ₹25,000 + ₹ 55,000
= ₹2,40,000
Current Ratio = ₹7,20,000 = 3 : 1
₹2,40,000
SOLUTION:

(b) Quick Ratio = Liquid Assets or Quick Assets


Current Liabilities
Liquid Assets = Current Assets - Inventories - Income Tax Paid in
Advance
= ₹ 7,20,000 - ₹ 3,90,000 - ₹ 30,000
= ₹ 3,00,000
Quick Ratio = ₹3,00,000 = 1.25 : 1
₹2,40,000
It is important to note that Provision for Doubtful Debts is deducted from Trade Receivables for
calculating Current Ratio and Quick Ratio.

Comments : The short-term financial position of the company is sound because its current ratio is
3: 1, which is more than the ideal ratio of 2 : 1. Liquid ratio of the company is 1.25 : 1, which is also
more than the ideal ratio of 1 : 1. Therefore, it can be said that the company is in a position to pay
its current liabilities instantly.
Calculate the Current Ratio from the following information :
₹
Total Assets 8,00,000
Fixed Assets 5,40,000
Non Current Investments 1,10,000
Shareholder’s Funds 6,00,000
Non Current Liabilities 80,000
SOLUTION:
Current Assets = Total Assets - Fixed Assets - Non Current Investment
= ₹ 8,00,000 + ₹5,40,000 – ₹1,10,000 = ₹1,50,000
Total of Assets side of Balance Sheet will be equal to total of Equity and Liabilities side.

Hence, Current Liabilities = Total Assets - Shareholders Funds


- Non Current Liabilities
= ₹ 8,00,000 - ₹ 6,00,000 -
₹ 80,000
Current Ratio = Current Assets = 1,50,000 = 1.25 : 1
Current Liabilities 1,20,000
THANK YOU!

You might also like