Answer Posted / sahil mangla
Liquidity ratio / Acid Test ratio / Quick Ratio is a short
term solvency ratio which shows the ability of a business
concern to meet its current liabilities or liquid
liabilities to be more precise.
It is calculated as :-
Liquid Assets
Liquid Ratio = --------------------
Liquid Liabilities
Where,
Liquid Assets = Current Assets - Stock - Prepaid expenses
+ Liquid Value of Stock
Liquid Assets means those assets which are convertible into
cash without any reduction in value, e.g.marketable
securities.
Liquid value of stock is the value at which the stock can
be realised at a short notice and is taken instead of its
cost because the stock price is not constant, and pp
expenses are not included as they cannot be used to pay off
any liability.
Liquid Liabilities = Current Liabilities - Bank O.D.
- Cash Credits - S.T.Loans
These are subtracted because bank O.D and Cash Credit
Facility are not withdrawn by banks all of a sudden and
liquid liability should only include those liabilities
which may be due instantaneousy at a very short notice.
ALTERNATIVELY,
Liquid Ratio may be computed as :-
Liquid Assets
--------------------
Current Liabilities
BUT, the first approach is much more advisable as it
provides the true picture of the liquidity position.
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