Types of Ratios: Accounting, Liquidity, Current, Quick and Cash Ratios

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Accounting Ratios

  • A Ratio is a relationship between two related variables. It indicates the quantity of one variable in relation to the other. For Ex- Sex Ratio indicates the number of females per thousand of males.
  • Accounting Ratios are the ratios computed on the basis of accounting information provided by the financial statements. Ex- Liquid Ratio, Net Profit Ratio etc.

Ques. Assertion (A) : If the financial statements contain some errors, the accounting ratios would also present an erroneous scenario.

Reasoning (R) : Accounting Ratios exhibit relationship if any, between accounting numbers extracted from financial statements.

A. Both (A) and (R) are true and (R) is the correct explanation.

B. Both (A) and (R) are true but (R) is the correct explanation.

C. (A) is correct but (R) is incorrect

D. Both (A) and (R) are incorrect

Types of Ratio

Liquidity Ratios

  • Liquidity Ratios assess the short-term financial position of the concern.
  • They indicate the ability of the firm to meet its current obligations on time.

Current Ratio

  • Current Ratio also known as Working Capital Ratio is the ratio of current assets to current liabilities. It measures the sufficiency of current assets to pay off the current liabilities as and when they are due for payment
  • Formula-
  • Ideal Ratio- 2: 1
Current Ratio

Ques. You are required to calculate Current Ratio from the following information:

Inventories

Trade Receivables

Advance Tax paid

Cash & Cash Equivalents

Trade Payables

Short Term borrowings (bank overdraft)

Solution-

Ques. If the current ratio is and the working capital is . Find the current assets.

(I)

(II)

(III)

(IV) (NET Dec 2012)

Solution-

Quick Ratio

  • Quick Ratio also known as Liquid Ratio or Acid Test Ratio is the ratio of liquid assets to current liabilities. It measures the sufficiency of liquid assets to pay off the current liabilities as and when they are due for payment
  • Formula-
  • Ideal Ratio- 1: 1
Quick Ratio

Cash Ratio

  • Cash Ratio also known as Absolute Liquidity Ratio is the ratio of cash & cash equivalents to current liabilities. It measures the firm՚s capacity to pay off its current liabilities with only cash & cash equivalents.
  • Formula-
  • Ideal Ratio- 0.5: 1
Cash Ratio

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