Page 52 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 4: Ratio Analysis

Self Assessment Notes

Fill in the blanks:

1. Ratio analysis, as a technique or analysis of ……………… uses this method of comparing
the various items found in fi nancial statements.
2. The accounting ratios are applied to study the relationship in between the ………………
information available and to take decision on the financial performance of the fi rm.

3. The …………… position are analysed through leverage ratios as well as coverage ratios.

4. The ……………… of the firms are studied on the basis of the total capital employed, total
asset employed and so on.

4.3 Liquidity Ratios

To study the short-term solvency or liquidity of the firm, the following are various ratios:

1. Current Assets Ratio
2. Acid Test Ratio or Quick Assets Ratio
3. Super Quick Assets Ratio

4.3.1 Current Assets Ratio

It is one of the important accounting ratios to find out the ability of the business fleeces to meet

out the short financial commitment. This is the ratio establishes the relationship in between the
current assets and current liabilities.
Did u know? What is meant by current assets and current liabilities?
Current assets are nothing but available in the form of cash, equivalent to cash or easily
convertible in to cash.

Current liabilities are nothing but short-term financial resources or payable in short span
of time within a year.
Current Assets
Current Ratio =
Current Liabilities

Example: Company XYZ has current assets worth of ` 5 lac, while the liabilities amount
to ` 3 lac. What is the current ratio of the fi rm?

Solution:
Current Assets
Current Ratio =
Current Liabilities
Current Ratio = 5/3 = 1.666 (approx)

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