Page 53 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes Figure 4.2: Elements of Current Ratio

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Caution Standard norm of the current ratio:
The ideal norm is 2:1; which means that every one rupee of current liability is appropriately
covered by two rupees of current assets.

High ratio leads to greater the volume of current assets more than the specified norm denotes
that the firm possesses excessive current assets than the requirement portrays idle funds invested

in the current assets.
A big limitation of current ratio is that under this ratio, the current assets are equally weighed
against each other to match the current liabilities. One rupee of cash is equally weighed at par with
the one rupee of closing stock, but the closing stock and prepaid expenses cannot be immediately
realized like cash and marketable securities.
Solved Problems for Practice

1. From the following, calculate the current ratio:
Current Assets: `
Cash in hand 4,00,000
Sundry Debtors 1,60,000
Stock 2,40,000
Current Liabilities:
Sundry creditors 3,00,000
Bills Payable 1,00,000

Current Ratio = Current Assets = ` 8,00,000 = 2
Current Liabilities ` 4,00,000
The fi rm satisfies the standard norm of the current asset ratio

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