Liquidity Short Term Solvency Ratios

In this case both Current Assets and Current Liabilities are to be taken into consideration.

Current Assets include:

• Prepaid expenses
• Cash in bank and hand
• Sundry debtors
• Stocks and receivable bills
• Short term investments
• Marketable securities
• Accrued income

Current Ratio =   Current Assets/ Current Liabilities

Current Liabilities include:

• Bank overdraft
• Payable bills
• Sundry creditors
• Advance income
• Outstanding expenses
• Income tax provision
• Payable dividend
• Bad debt provision

Liquid/Acid test/Quick Ratio are:

Liquid Liabilities/ Liquid Assets (or) LA/CL or Acid Test Ratio = Quick assets/ Quick Liabilities

Liquid liabilities or quick liabilities = All current liabilities except bank overdraft

Liquid Assets or quick assets = All current assets except stock

Net working Capital Ratio = Net working Capital / Net Assets

Net working capital = Current assets – Current liabilities

Cash Position Ratio = (Cash + Marketable Securities)/Current Liabilities

Solvency Ratio = Outside Liabilities/ Total Assets

Links of Previous Main Topic:-

• Introduction to accounting and branches of accounting
• Preparation of final accounts
• Introduction of fund flow statement
• Introduction cash flow statement
• Ratio analysis significance of ratio analysis
• Advantages of ratio analysis
• Limitation of ratio analysis
• Classification of ratios

Links of Next Finance Topics:-

• Long term solvency ratios
• Profitability ratios
• Activity or turnover ratios
• Leverage or capital structure ratios
• Test questions in ratio analysis
• Ratio analysis problems and solutions