|
Explain liquidity group ratios.
Under this following ratios are calculated, indicates the short term position of the organization. It also indicates the efficiency with which the working capital is being used. Commercial banks and short term creditors are interested in these ratios.
- Current Ratio indicates the backing available to current liabilities in the form of current assets. A higher current ratio indicates that sufficient assets are available with the organization which can be converted in the form of cash without reduction in value, in a short span of item. Higher the ratio better will be the situation. A standard and ideal current ratio is 2:1
Formula to calculate current ratio = Current Assets / Current Liabilities
- Liquid Ratio or Acid Test Ratio or Quick Ratio indicates the backing available to liquid liabilities in the form of liquid assets. A higher liquid ratio indicates that sufficient assets are available with the organization which can be converted in the form of cash almost immediately to pay off those liabilities which are to be paid off almost immediately. Higher the ratio better will be the situation. A standard and ideal liquid ratio is 1:1
Formula to calculate current ratio = Liquid Assets / Liquid Liabilities
|
