Class 12 Accountancy - Company Accounts and Analysis of Financial Statements - Chapter Accounting Ratios NCERT Solutions | What are liquidity ratios? Discuss the i
What are liquidity ratios? Discuss the importance of current and liquid ratio.
Liquidity ratios are calculated to determine the short-term solvency of a business, i.e. the ability of the business to pay back its current dues. Liquidity means easy conversion of assets into cash without any significant loss and delay. Short-term creditors are interested in ascertaining liquidity ratios for timely payment of their debts.
Liquidity ratio includes:
Current Ratio: It explains the relationship between current assets and current
liabilities. It is calculated as:
Current Ratio = Current Assets/Current Liabilities
Liquid Ratio or Quick Ratio: It explains the relationship between liquid assets and current liabilities. It indicates whether a firm has sufficient funds to pay its current liabilities immediately. It is calculated as:
Liquid Ratio = Liquid Asset/Current LiabilitiesLiquid
Liquids Assets = Current Assets – Stock – Prepaid Expenses.
More Questions From Class 12 Accountancy - Company Accounts and Analysis of Financial Statements - Chapter Accounting Ratios
- Q:-
The current ratio provides a better measure of overall liquidity only when a
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quick ratio is a preferred measure of overall liquidity. Explain. - Q:-
The liquidity of a business firm is measured by its ability to satisfy itslong-
term obligations as they become due. What are the ratios used forthis purpose? - Q:-
What relationships will be established to study?
(a) Inventory Turnover (b) Debtor Turnover
(c) Payables Turnover (d) Working Capital Turnover - Q:-
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The average age of inventory is viewed as the average length of time inventory is held by the firm or as the average number of days’ sales in inventory. Why?
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