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.
Popular Questions of Class 12 Accountancy - Company Accounts and Analysis of Financial Statements
- Q:-
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 - Q:-
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. - Q:-
Explain the usefulness of trend percentages in interpretation of financial performance of a company.
- 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:-
What do you understand by analysis and interpretation of financial statements? Discuss its importance.
- Q:-
State the importance of financial statements to
(i) shareholders
(ii) creditors
(iii) government
(iv) investors - Q:-
What is the importance of comparative statements? Illustrate youranswer with particular reference to comparative income statement.
- Q:-
What do you mean by Ratio Analysis?
- Q:-
Describe the different techniques of financial analysis and explain the limitations of financial analysis.
Recently Viewed Questions of Class 12 Accountancy - Company Accounts and Analysis of Financial Statements
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List the techniques of Financial Statement Analysis.
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Prepare the format of statement of profit and loss and explain its items.
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Explain the nature of the financial statements.
- Q:-
State the importance of financial statements to
(i) shareholders
(ii) creditors
(iii) government
(iv) investors - Q:-
List any three objectives of analysing financial statements?
- Q:-
What relationships will be established to study?
(a) Inventory Turnover (b) Debtor Turnover
(c) Payables Turnover (d) Working Capital Turnover - Q:-
State the meaning of Analysis and Interpretation.
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Prepare the format of balance sheet and explain the various elements of balance sheet.
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‘Financial statements reflect a combination of recorded facts, accounting
conventions and personal judgements’ discuss.
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