Liquidity ratios are the ratios that measure the ability of acompany to meet its short term debt obligations.These ratios measure the ability of a company to pay off itsshort-term liabilities when they fall due.The important ratios in measuring short term solvency are:1. current ratio2. quick ratio3.absolute liquid ratio
The current ratio is a financial ratio that measures whether ornot a firm has enough resources to pay its debts over the next12 months.It compares a firms current assets to its current liabilities.current ratio = Current asset_______________Current liability
It is also known as Acid test ratio, or quick ratio, orliquid ratio.It measures the ability of a company to use itsnear cash or quick assets to extinguish or retire itscurrent liabilities immediately.Quick assets include those current assets thatpresumably can be quickly converted to cash atclose to their book values.QUICK RATIO = ( CURRENT ASSET- INVENTORY-ACCOUNTS RECEIVABLE)_____________________________________CURRENT LIABILITY
The absolute liquidity ratio is usedto calculate what the companys networth is.It is the ratio of absolute liquidassets to current liabilities.This ratio is used to determine theabsolute liquid position of a firm orcompany.
It measure a companys ability to generateearnings relative to sales, assets and equity.These ratios assess the ability of a company togenerate earnings, profits and cash flows relativeto relative to some metric, often the amount ofmoney invested.Major profitability ratio are:1.Gross profit margin2. Net profit margin3.Cash profit ratio4.Return on total asset5. Return on shareholders fund
The ratio measures the gross profitmargin on the total net sales madeby the company.Gross profit margin =cost of goods sold x 100_____________________Sales
This ratio is designed to focus attention on thenet profit margin arising from the businessoperation before interest and tax is deducted.Net profit margin =net profit after tax x 100_____________________Sales
Cash profit ratio measures the cashgeneration in the business as a result ofthe operations expressed in the sales.Cash profit ratio =cash profit x 100_________________Sales
This ratio indicates the efficiency ofutilisation of assets in generatingrevenue.Return on total asset =Net profit after tax x 100_____________________Total assets
Scope :It is suitable only for such business concerns which are engaged inmanufacturing, production, mining or providing some service (e.g.bus company electric supply company etc.)It is suitable for all businesses - manufacturing, production or evenin marketing only.
Pre-determined and historical accountingIn cost accounting, the expenditure to be incurred isestimated and standard cost of product is found. Thus, itact as a pre-determined process.In Financial accounting, accounting is done after theexpenditure has already been incurred and not prior tothat. So it is historical accounting.
Transactions related with productionactivities only are accounted for in thismethod. Donations, dividend received,etc. are not taken into account as theseare not related with production.All economic transactions are taken intoaccount, whether these are related withproduction or not.
By cost accounting the price of the product canbe fixed more accurately in a scientific manner.In the absence of information about cost, theselling price fixed by this method may bemisleading.
Profit calculated by this method expresses theresult of production activities.Profit calculated by this method expresses theprofit of the organization.
Full and correct information about the cost,per unit cost, various elements of cost, etc. ofthe product is made available in costaccounting.Financial accounting does not give suchdetailed and correct information.