Page 193 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes 11.3 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

11.3.1 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)

Figure 11.2: Elements of Current Ratio

Trade Creditors
Bank Overdraft
Bills Payable

Provision for Taxation
Prepaid Expenses Outstanding Expenses
Outstanding Incomes Pre-received Incomes

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