Liquidity ratios
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The document discusses liquidity ratios, which analyze a firm's short-term financial position and ability to meet current liabilities with current assets. It defines the current ratio as current assets divided by current liabilities, with 1.5:1 typically considered satisfactory. The quick or acid test ratio measures a firm's ability to use quick assets like cash to pay current liabilities immediately, excluding inventory from current assets. Both ratios above 1 indicate a company can meet short-term obligations, while ratios below 1 suggest potential issues with liquidity. The document provides an example calculation of both ratios.
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Ratio analysis - Liquidity Ratios
Liquidity Ratios
This type of ratio helps in measuring the ability of a company to take care of its short-term debt obligations. A higher liquidity ratio represents that the company is highly rich in cash.
The types of liquidity ratios are: –
Current Ratio or Working Capital Ratio
Quick Ratio or Liquidity Ratio or Acid Test Ratio
Absolute Liquid Ratio or Cash Ratio
Stock to Working Capital Ratio
Current Ratio: The current ratio is the ratio between the current assets and current liabilities of a company. The current ratio is used to indicate the liquidity of an organization in being able to meet its debt obligations in the upcoming twelve months. A higher current ratio will indicate that the organization is highly capable of repaying its short-term debt obligations.
Current Ratio = Current Assets / Current Liabilities
Current Assets:
Current Assets means cash and those assets which can be converted into cash within one year in ordinary course of business.
Current Liabilities:
Current Liabilities are those which are to be paid by the firm in one year.
Quick Ratio or Liquidity Ratio or Acid Test Ratio :
The quick ratio is used to ascertain information pertaining to the capability of a company in paying off its current liabilities on an immediate basis.
The formula used for the calculation of a quick ratio is-
Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivables) / Current Liabilities
. Absolute Liquid Ratio or Cash Ratio:
The cash ratio measures a company’s ability to pay off short-term liabilities with cash and cash equivalents:
Cash ratio = Cash and Cash equivalents / Current Liabilities
Stock to Working Capital Ratio:
It is calculated by dividing the value of stock (or inventories such as raw materials, work in progress, finished goods, stores and packing materials) by the Working capital.
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A current asset is either cash or an asset (e.g. stock) that can be converted into cash within a year and is often used to pay off current liabilities.
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Ratio analysis - Liquidity Ratios
Liquidity Ratios
This type of ratio helps in measuring the ability of a company to take care of its short-term debt obligations. A higher liquidity ratio represents that the company is highly rich in cash.
The types of liquidity ratios are: –
Current Ratio or Working Capital Ratio
Quick Ratio or Liquidity Ratio or Acid Test Ratio
Absolute Liquid Ratio or Cash Ratio
Stock to Working Capital Ratio
Current Ratio: The current ratio is the ratio between the current assets and current liabilities of a company. The current ratio is used to indicate the liquidity of an organization in being able to meet its debt obligations in the upcoming twelve months. A higher current ratio will indicate that the organization is highly capable of repaying its short-term debt obligations.
Current Ratio = Current Assets / Current Liabilities
Current Assets:
Current Assets means cash and those assets which can be converted into cash within one year in ordinary course of business.
Current Liabilities:
Current Liabilities are those which are to be paid by the firm in one year.
Quick Ratio or Liquidity Ratio or Acid Test Ratio :
The quick ratio is used to ascertain information pertaining to the capability of a company in paying off its current liabilities on an immediate basis.
The formula used for the calculation of a quick ratio is-
Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivables) / Current Liabilities
. Absolute Liquid Ratio or Cash Ratio:
The cash ratio measures a company’s ability to pay off short-term liabilities with cash and cash equivalents:
Cash ratio = Cash and Cash equivalents / Current Liabilities
Stock to Working Capital Ratio:
It is calculated by dividing the value of stock (or inventories such as raw materials, work in progress, finished goods, stores and packing materials) by the Working capital.
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This document discusses liquidity ratios, which analyze a company's ability to pay off short-term debts. It defines the current ratio and acid test ratio, and provides formulas to calculate them using data from a company's balance sheet. The current ratio compares a company's current assets to its current liabilities, with a desirable ratio of 1.5-2.0. The acid test ratio is a more stringent measure that excludes inventory from current assets, since it may not be quickly converted to cash. An example calculation shows one company's current ratio is healthy but its acid test ratio indicates it may be experiencing a liquidity crisis.
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The study analyzed the impact of working capital management on the profitability of 58 small manufacturing firms in Mauritius over the period of 1998-2003. The results showed that return on total assets, a measure of profitability, was positively correlated with measures of working capital management efficiency like accounts receivable days and cash conversion cycle. However, it was negatively correlated with accounts payable days. The paper concluded that synchronizing current assets and liabilities is important for small firm profitability and the paper industry showed best practices in working capital management.
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Liquidity ratio
Liquidity Ratio
Measures the relationship between current assets and current liabilities with the help of data extracted from the balance sheet of the company
Assess the ability of business to meet its short-term obligation usually one year
Assess whether the business has sufficient cash and current assets to pay back its current liabilities
Types of Liquidity Ratio
Current Ratio, Quick Ratio, Cash Ratio
Current Ratio
It measures the ability of the business to meet its current liabilities by converting current assets into cash during the operating cycle of the firm to pay off the debt efficiently on time
Higher the current ratio, better is the firm’s position in managing its working capital
The standard current ratio showing an efficient liquidity is 2:1
Formula, Current Ratio = (𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬)/(𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬)
Quick Ratio
Quick ratio is also known as acid-test ratio
It takes into account only those current assets which are highly liquid so it excludes the inventory/stocks from current asset
Formula, Quick Ratio = (𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬 −𝐒𝐭𝐨𝐜𝐤𝐬 −𝐏𝐫𝐞𝐩𝐚𝐢𝐝 𝐄𝐱𝐩𝐞𝐧𝐬𝐞𝐬)/(𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬)
Quick assets = Current Assets – Stocks – Prepaid Expenses
A standard quick ratio is considered to be 1:1 which is safe for any business
Thus, quick ratio is an indicator of a company’s short-term liquidity position and measures ability of business to meet its short-term obligations with most liquid assets
Cash Ratio
Cash ratio is the most stringent measure of liquidity which takes into account only cash & cash equivalents to get the working capital efficiency of business
The metric calculates a company's ability to repay its short-term debt with readily-liquidated cash resources
Formula, Cash Ratio = (𝐂𝒂𝒔𝒉 & 𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔)/(𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬)
Cash equivalents are the assets that can speedily get converted into cash as and when required like cash on hand, demand deposits, money market instruments, savings accounts.
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Liquidity Ratios are an integral part of financial statement analysis. These are various measures to find or to ascertain the firm’s ability to meet the short term expenses or liabilities and convertibility to liquid assets (for further reading click the link) into cash on requirement. Copy the link given below and paste it in new browser window to get more information on Liquidity Ratio:- http://www.transtutors.com/homework-help/accounting/financial-statement-analysis-liquidity-ratios/
Liquidity ratio
Liquidity Ratio
Measures the relationship between current assets and current liabilities with the help of data extracted from the balance sheet of the company
Assess the ability of business to meet its short-term obligation usually one year
Assess whether the business has sufficient cash and current assets to pay back its current liabilities
Types of Liquidity Ratio
Current Ratio, Quick Ratio, Cash Ratio
Current Ratio
It measures the ability of the business to meet its current liabilities by converting current assets into cash during the operating cycle of the firm to pay off the debt efficiently on time
Higher the current ratio, better is the firm’s position in managing its working capital
The standard current ratio showing an efficient liquidity is 2:1
Formula, Current Ratio = (𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬)/(𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬)
Quick Ratio
Quick ratio is also known as acid-test ratio
It takes into account only those current assets which are highly liquid so it excludes the inventory/stocks from current asset
Formula, Quick Ratio = (𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬 −𝐒𝐭𝐨𝐜𝐤𝐬 −𝐏𝐫𝐞𝐩𝐚𝐢𝐝 𝐄𝐱𝐩𝐞𝐧𝐬𝐞𝐬)/(𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬)
Quick assets = Current Assets – Stocks – Prepaid Expenses
A standard quick ratio is considered to be 1:1 which is safe for any business
Thus, quick ratio is an indicator of a company’s short-term liquidity position and measures ability of business to meet its short-term obligations with most liquid assets
Cash Ratio
Cash ratio is the most stringent measure of liquidity which takes into account only cash & cash equivalents to get the working capital efficiency of business
The metric calculates a company's ability to repay its short-term debt with readily-liquidated cash resources
Formula, Cash Ratio = (𝐂𝒂𝒔𝒉 & 𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔)/(𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬)
Cash equivalents are the assets that can speedily get converted into cash as and when required like cash on hand, demand deposits, money market instruments, savings accounts.
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Subscribe to Devtech Finance
Financial Statement Analysis
This document discusses financial statement analysis, which involves reviewing a company's financial statements like the income statement, balance sheet, and cash flow statement to assess the company's financial health and performance over time and relative to other companies. Key aspects of financial analysis include evaluating profitability, solvency, liquidity, and stability using tools like ratio analysis, comparative statements, common size statements, and trend analysis. The results of financial analysis are used by various interested parties like management, investors, and creditors to evaluate financial performance, position, operating efficiency, and predict future performance.
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This document discusses liquidity ratios and ratio analysis. It defines liquidity ratios as ratios used to test a company's short-term solvency and ability to pay off current liabilities with current assets. The two main liquidity ratios discussed are the current ratio, which compares current assets to current liabilities, and the quick ratio, which compares quick current assets to current liabilities. The document provides examples of how to calculate these ratios using sample company financial data and interprets the results. It concludes by noting some limitations to ratio analysis for financial evaluation and comparison purposes.
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Working Capital.
Here are the calculations of the three working capital ratios based on the information provided:
Current Ratio = Total Current Assets / Total Current Liabilities
Current Assets = Rs. 0
Current Liabilities = Rs. 0
Current Ratio = #DIV/0! (Not defined as there are no current assets or liabilities provided)
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Inventory = Rs. 0
Quick Ratio = #DIV/0! (Not defined as there are no current assets or liabilities provided)
Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities
Cash & Cash Equivalents = Rs. 0
Cash Ratio = #DIV
Capital structure-theories
This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
Presentation on Working capital management
The document discusses working capital management. It defines working capital as the excess of current assets over current liabilities, representing the funds available to run day-to-day operations. It notes that working capital management involves managing current assets like cash, debtors, and inventory as well as current liabilities like creditors. Proper working capital management is important for business liquidity, profitability, and survival, especially in today's competitive environment. The key steps in working capital management include cash management, debtors management, inventory management, and creditors management.
Financial ratio analysis
This document discusses various financial ratios that can be used to analyze the financial performance and health of a company. It provides definitions and formulas for key liquidity ratios like current ratio and quick ratio, leverage ratios like debt-equity ratio, activity ratios like inventory turnover ratio and average collection period, and profitability ratios like gross profit margin ratio. Specific calculations are shown for a company to illustrate how to compute various ratios from the company's financial statements. The document emphasizes the importance of ratio analysis for evaluating a company's performance over time and in comparison to other companies.
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Manpreet Kaur discusses the differences between profit maximization and wealth maximization as objectives for financial management. [1] Profit maximization aims to increase earnings and is a short-term approach, but it can exploit workers and consumers. [2] Wealth maximization seeks to increase long-term shareholder value by maximizing the current stock price, balancing the interests of various stakeholders. [3] While both have drawbacks, wealth maximization is generally considered a more appropriate objective as it considers the time value of money and risk over the long run.
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Liquidity ratios.ppt
This document discusses ratio analysis and various liquidity ratios used to evaluate a company's short-term financial health and ability to meet current obligations. It defines key liquidity ratios like current ratio, quick ratio, and cash ratio and provides the ideal ratios. Current ratio compares current assets to current liabilities. Quick ratio looks at more liquid current assets. Cash ratio only considers the most liquid assets. The document also provides tips to improve liquidity ratios if they are low, such as selling assets, postponing investments, or raising capital.
Ratio analysis
Ratio analysis involves computing relationships between financial statement items to interpret a firm's strengths, weaknesses, historical performance, and current condition. Ratios are classified into liquidity, capital structure, profitability, and activity ratios. Liquidity ratios measure short-term solvency and ability to meet current commitments, such as current and quick ratios. Capital structure ratios indicate long-term solvency and ability to repay debt, like debt-equity and proprietary ratios. Ratios are most informative when compared over time, against industry standards, or between firms.
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Ratio analysis involves computing relationships between financial statement items to interpret a firm's strengths, weaknesses, historical performance, and current condition. Ratios are classified into liquidity, capital structure, profitability, and activity ratios. Liquidity ratios measure short-term solvency, capital structure ratios measure long-term solvency, profitability ratios measure operating efficiency and returns, and activity ratios measure resource utilization. Caution must be exercised when interpreting ratios, which are best analyzed over time, against industry benchmarks, or through inter-firm comparison.
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Short intro to window dressing and stock to working capital, current ration & quick ratio. Formula with description may solve your quarries
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Ratio by mudassar
Ratio analysis involves calculating and comparing financial ratios to analyze a firm's financial statements and determine its strengths, weaknesses, and financial condition. Ratios compare various data points in the financial statements to reveal important relationships. Common types of ratios include liquidity ratios, capital structure ratios, profitability ratios, and activity ratios. Ratio analysis is an important financial analysis tool that allows users to evaluate trends over time, compare performance to competitors or standards, and identify areas for improvement.
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Ratio analysis involves calculating and comparing financial ratios to analyze a firm's financial statements and determine its strengths, weaknesses, and financial condition. Ratios compare various data points in the financial statements and are used to interpret the relationships between different elements. Common types of ratios include liquidity ratios, capital structure ratios, profitability ratios, and activity ratios. Financial ratios provide insight into a firm's performance, position, and prospects when analyzed over time and compared against industry standards or competitors.
Part05 finance investment_ratio_analysis_liquidity_ratio_presentation
Liquidity ratios measure a company's ability to pay short-term debts. They include the current ratio, acid test ratio, and cash ratio. The current ratio compares current assets to current liabilities. The acid test ratio is similar but excludes inventories since they may not convert to cash quickly. The cash ratio considers only the most liquid assets like cash and marketable securities compared to current liabilities. These ratios are used to analyze a company's short-term financial health and liquidity.
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It is extreme important for a firm to able to meet its obligation as.pdf
It is extreme important for a firm to able to meet its obligation as they become due. liquidity ratio
measures the ability of the firm to meet its current obligations(liabilities).A firm should ensure
that it does not suffer from lack of liquidity and also that it does not have excess liquidity. The
higher the ratio, the more liquid the company is. Low values indicate that a firm may have
difficulty meeting obligations.
All other things being equal, In general point of view a high liquid ratio to be better than a low
liquid ratio, because a high liquid ratio means that the company is more likely to meet its
liabilities which are due .
In general, low or decreasing ratios generally suggest that a company is over-leveraged,
struggling to maintain or grow sales, paying bills too quickly or collecting receivables too
slowly. On the other hand, a high or increasing ratio generally indicates that a company is
experiencing solid top-line growth, quickly converting receivables into cash, and easily able to
cover its financial obligations. Such companies often have faster inventory turnover and cash
conversion cycles.
Since the circumstances for every business and industry are different, making it difficult to create
a universal benchmark for healthy liquidity ratios. The best practice for investors, lenders and
managers is to consider liquidity ratios of successful competitors and historical trends.
In general terms the current ratio of 2 to 1 is considered satisfactory
and quick ratio of1 to 1 is considered to represent a satisfactory current financial condition. It is
possible to have higher values of current and quick ratio but the higher value of these ratio
indicates that that the business managers is unable to find investment opportunities .A higher
degree of liquidity is also bad as idle asset earns nothing, the firms fund will be unnecessary tied
up in current asset.
Solution
It is extreme important for a firm to able to meet its obligation as they become due. liquidity ratio
measures the ability of the firm to meet its current obligations(liabilities).A firm should ensure
that it does not suffer from lack of liquidity and also that it does not have excess liquidity. The
higher the ratio, the more liquid the company is. Low values indicate that a firm may have
difficulty meeting obligations.
All other things being equal, In general point of view a high liquid ratio to be better than a low
liquid ratio, because a high liquid ratio means that the company is more likely to meet its
liabilities which are due .
In general, low or decreasing ratios generally suggest that a company is over-leveraged,
struggling to maintain or grow sales, paying bills too quickly or collecting receivables too
slowly. On the other hand, a high or increasing ratio generally indicates that a company is
experiencing solid top-line growth, quickly converting receivables into cash, and easily able to
cover its financial obligations. Such companies often have faster invento.
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Ratio analysis
This document discusses various types of financial ratios used to analyze a company's financial statements, including liquidity ratios, leverage ratios, efficiency ratios, and profitability ratios. It provides definitions and calculations for key ratios within each category, such as current ratio and quick ratio for liquidity, debt-equity ratio for leverage, inventory turnover for efficiency, and return on assets (ROA) and return on equity (ROE) for profitability. These ratios are used to evaluate a company's short-term solvency, use of debt financing, asset utilization, and earnings generation.
Ratio analysis advantages and limitations (Complete Chapter)
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Ratioanalysis
This document discusses ratio analysis, which involves interpreting numerical relationships based on financial statements to evaluate a company's performance. Ratios are classified into liquidity ratios, which assess short-term solvency, and solvency ratios, which evaluate long-term financial position. Key liquidity ratios discussed are current ratio, quick ratio, and absolute liquidity ratio. Important solvency ratios mentioned include debt-equity ratio, proprietary ratio, and fixed assets to net worth ratio. The document provides formulas and interpretations for these ratios.
Financial statements...Simplified
The document provides financial information for XXX Constructions Pvt. Ltd for the fiscal years 2013 through 2016. It includes key metrics such as net sales, operating profit, PAT, cash profit, margins, tangible net worth, total liabilities, and ratios such as TOL/TNW. XXX Constructions is an Indian mining and construction company that diversified into Africa in 2012 by establishing a subsidiary in Zambia. The financial position of the company appears stable with consistent sales growth and profits over the period analyzed.
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The document discusses various types of financial ratios used to analyze companies. It describes liquidity ratios like current ratio and acid test ratio which measure a company's ability to meet short-term obligations. Leverage ratios like debt-equity ratio and debt-asset ratio assess the financial risk from a company's use of debt. Efficiency ratios examine how effectively a company uses its assets. Profitability ratios evaluate a company's net profit margins and returns on assets and equity.
Citibank ratio analysis
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Computing Different Types of Financial Ratios
This document discusses key financial ratios used to analyze a company's financial health and performance. It provides definitions and examples of ratios categorized under solvency, liquidity, profitability, and efficiency. Specifically, it outlines debt ratios, current ratios, return on equity, net profit margin, and inventory/receivables turnover ratios. The most useful ratios for analysis are identified as the debt-to-equity ratio, current ratio, quick ratio, return on equity, and net profit margin.
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Seminar: Gender Board Diversity through Ownership Networks
Seminar: Gender Board Diversity through Ownership Networks
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Role of Information Technology in Revenue - Prof Oyedokun.pptx
Role of Information Technology in Revenue - Prof Oyedokun.pptx
Liquidity ratios
- 2. Liquidity ratios These ratios analyse the short-term financial position of a firm and indicate the ability of the firm to meet its short-term commitments (current liabilities) out of its short-term resources (current assets). These are also known as ‘solvency ratios’. The ratios which indicate the liquidity of a firm are: Current ratio Liquidity ratio or Quick ratio or acid test ratio
- 3. Current ratio It is calculated by dividing current assets by current liabilities. Current ratio = Current assets where Current liabilities Conventionally a current ratio of 1.5:1 is considered satisfactory A ratio of 5 : 1 would imply the firm has Rs 5/- of assets to cover every Rs 1/- in liabilities A ratio of 0.75 : 1 would suggest the firm has only 75p in assets available to cover every Rs.1/- it owes
- 4. CURRENT ASSETS include – Inventories of raw material, WIP, finished goods, stores and spares, sundry debtors/receivables, short term loans deposits and advances, cash in hand and bank, prepaid expenses, incomes receivables and marketable investments and short term securities. CURRENT LIABILITIES include – sundry creditors/bills payable, outstanding expenses, unclaimed dividend, advances received, incomes received in advance, provision for taxation, proposed dividend, instalments of loans payable within 12 months, bank overdraft and cash credit
- 6. CA= cash in bank + prepaid expenses + bills receivables + sundry debtors CA= 12500 + 15500 + 5250 + 130750 = 164000 CL= Sundry creditors = 101500 CR= CA/CL = 164000 / 101500 = 1.615
- 7. Quick Ratio or Acid Test Ratio In Finance, The Acid –Test ratio or quick ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets includes those current assets that can be quickly converted to the cash. Quick ratio = (current assets – inventories) / current liabilities Or Quick ratio= (cash and equivalents + marketable securities + accounts receivable) / current liabilities
- 8. Quick Ratio Analysis A quick ratio of 1.5 means that a company has $1.50 of liquid assets available to cover each $1 of current liabilities Ideally, quick ratio should be 1:1. If quick ratio is higher, company may keep too much cash on hand or have a problem collecting its accounts receivable. A quick ratio higher than 1:1 indicates that the business can meet its current financial obligations with the available quick funds on hand. A quick ratio lower than 1:1 may indicate that the company relies too much on inventory or other assets to pay its short-term liabilities. A company with a Quick Ratio of less than 1 cannot currently fully pay back its current liabilities.
- 10. SOLUTION CA= cash in bank + prepaid expenses + bills receivables + sundry debtors CA= 12500 + 15500 + 5250 + 130750 = 164000 CL= Sundry creditors = 101500 QR= CA- (Inventory + Prepaid expenses)/CL = 164000 -15500/ 101500 = 1.46
- 11. THANK YOU - Ankit Doshi K006 - Amit Dudi K007