Page 122 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 6: Financial Statements: Analysis and Interpretation

On the basis of Functions Notes

1. On the basis of solvency position of the firms: Short-term and long-term solvency position
of the firms.
2. On the basis of profitability of the firms: The profitability of the firms are studied on the
basis of the total capital employed, total asset employed and so on.
3. On the basis of effectiveness of the firms: The effectiveness is studied through the turnover
ratios — Stock turnover ratio, Debtor turnover ratio and so on.
4. Capital structure ratios: The capital structure position are analysed through leverage
ratios as well as coverage ratios.

6.3.1 Short-term Solvency 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
Defensive Interval Ratio

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?
Current assets are nothing but available in the form of cash, equivalent to cash or easily
convertible in to cash.
What is meant by the current liabilities?
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 firm?
Solution:

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

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