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Accounting Ratio .......

The document explains the concept of ratios, specifically accounting ratios, which express the relationship between two related items in financial terms. It outlines different types of accounting ratios, including liquidity, solvency, activity, and profitability ratios, and details the liquidity ratios that measure a company's ability to meet short-term liabilities. Key formulas for calculating the current ratio and quick ratio are provided to assess a firm's financial health.

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Maninder sng Kshatriya
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33 views2 pages

Accounting Ratio .......

The document explains the concept of ratios, specifically accounting ratios, which express the relationship between two related items in financial terms. It outlines different types of accounting ratios, including liquidity, solvency, activity, and profitability ratios, and details the liquidity ratios that measure a company's ability to meet short-term liabilities. Key formulas for calculating the current ratio and quick ratio are provided to assess a firm's financial health.

Uploaded by

Maninder sng Kshatriya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Ratio is an arithmetical expression of relationship between two

interdependent or related item. Ratio when calculated on the


basis of accounting information are called Accounting Ratio. It
is expressed in p/q

Accounting ratio can be expressed by any of the following manner:


➢ Pure Ratio
➢ Percentage
➢ Time
➢ Fraction

Types of Ratios
Liquidity Ratio Solvency Activity Ratio Profitability
Ratio Ratio
They They reflect
measures the These ratios the These ratios
firm’s ability show the firm’s measure
to meet proportion of efficiency overall
current debt and in utilizing the performance
obligations. equity Assets. &
in financing Effectiveness
the of the firm
firm’s assets.
Liquidity Ratio
Liquidity ratios Measures the ability of a company to pay off its short-
term liabilities. It determine how quickly a company can convert the
assets and use them for meeting the dues that arise.
The higher the ratio, the easier is the ability to clear the debts and
avoid defaulting on payments.
Liquidity Ratio

QUICK/ LIQUID/ ACID


Current Ratio
TEST RATIO

Current Ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠/ 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖es


Current Assets = Current Investments + Inventories (excluding Loose Tools and
Spare Parts) + Trade Receivables + Cash and Bank Balances + Short-term
Loans and Advances + Other Current Assets Current Liabilities = Short-term
Borrowings + Trade Payables + Other Current Liabilities + Short-term
Provisions Note: Current Ratio includes Net Debtors (i.e., Gross Debtors -
Provision for Doubtful Debts).

b) Quick Ratio/Liquid Ratio = 𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑟 𝐿𝑖𝑞𝑢𝑖𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 /𝐶𝑢𝑟𝑟𝑒𝑛𝑡


𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝐴𝑙𝑙 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 (𝑒𝑥𝑐𝑙𝑢𝑑𝑖𝑛𝑔 𝐿𝑜𝑜𝑠𝑒 𝑡𝑜𝑜𝑙𝑠)- 𝐶𝑢𝑟𝑟𝑒𝑛𝑡


𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖es

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