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.
How will you disclose the following items in the Balance Sheet of a company;
(i) Loose tools
(ii) Uncalled liability on partly paid-up shares
(iii) Debentures redemption reserve
(iv) Mastheads and publishing titles (v) 10% debentures
(vi) Proposed dividend
(vii) Share forfeited account
(viii) Capital redemtion reserve
(ix) Mining rights
(x) Work-in-progress
The current ratio provides a better measure of overall liquidity only when a
firm’s inventory cannot easily be converted into cash. If inventory is liquid, the
quick ratio is a preferred measure of overall liquidity. Explain.
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?
What relationships will be established to study?
(a) Inventory Turnover (b) Debtor Turnover
(c) Payables Turnover (d) Working Capital Turnover
Explain the usefulness of trend percentages in interpretation of financial performance of a company.
What do you understand by analysis and interpretation of financial statements? Discuss its importance.
Explain the limitations of financial statements.
State the importance of financial statements to
(i) shareholders
(ii) creditors
(iii) government
(iv) investors
What do you mean by Ratio Analysis?
Explain how common size statements are prepared giving an example.
What are various types of ratios?
How will you disclose the following items in the Balance Sheet of a company;
(i) Loose tools
(ii) Uncalled liability on partly paid-up shares
(iii) Debentures redemption reserve
(iv) Mastheads and publishing titles (v) 10% debentures
(vi) Proposed dividend
(vii) Share forfeited account
(viii) Capital redemtion reserve
(ix) Mining rights
(x) Work-in-progress
Explain in detail about the significance of the financial statements.
What do you mean by Ratio Analysis?
Explain how financial statements are useful to the various parties who are interested in the affairs of an undertaking?
Explain the limitations of financial statements.
State the importance of financial statements to
(i) shareholders
(ii) creditors
(iii) government
(iv) investors
Explain how common size statements are prepared giving an example.
What do you understand by analysis and interpretation of financial statements? Discuss its importance.
Explain the usefulness of trend percentages in interpretation of financial performance of a company.