Types of Liquidity ratio Archives - RBL Academy

Ratio Analysis Ratio means comparison of quantitative relationship between two common variables that expresses how much bigger one is than the other. Accounting ratio analysis is a scientific and effective tool of evaluating operating and financial position of a company by determining and interpreting quantitative relationship among variables of financial statement. Types of Accounting Ratio Broadly Accounting ratio has been classified into four categories: 1. Liquidity ratio These ratios are calculated to measure the firm’s ability to meet short term obligations. 2. Solvency ratio It is calculated to assess long term financial position of the company and ability to pay off long term obligations. 3. Turnover or Activity ratio These ratios help to assess how efficiently a company is utilizing its resources. 4. Profitability ratio These ratios help to assess business ability to generate profit out of sales and expenses incurred on generation sales. Types of Liquidity ratio I. Current ratio = Current Asset ÷ Current Liability (2:1 is ideal) II. Liquid ratio/ Quick ratio/ Acid Test Ratio = Liquid or quick asset ÷ Current Liability (1:1 is ideal) Note: Current Asset = Current Investment + Inventories (excluding spares & loose tools)+Net Trade receivables (Trade Receivable - Provision for doubtful debts and discount on debtors) +Cash & Cash equivalent+Short term loans & advances+Other current assets such as Prepaid expenses, Accrued income, Interest receivable, advance tax Current liability = Short term borrowing +Trade payables+Short term provisions+Other current liability such as Outstanding expense, Income received in advance. Liquid Asset = Current asset – Inventory – Prepaid expense Working Capital = Current Asset – Current Liability Types of Solvency ratios I. Debt to Equity Ratio = Long term Debt or Non Current liability ÷ Equity or Shareholders’ fund II. Total asset to debt ratio = Total asset ÷ Non Current liability or Long term debt III. Proprietary ratio = Shareholders’ fund or proprietors’ fund ÷ Total asset IV. Interest Coverage ratio = Earning or Profit before interest and tax ( EBIT or PBIT) ÷ Interest on long term Debt (NCL)* Note: Non-Current liability (NCL) or Long term debt = Long term borrowing such as Debentures, Long term loans + Deferred tax liability + Long term provisions such as Long Term Provision for Gratuity, Leave Encashment, Provision workmen compensation towards VRS etc + Other long term liabilities Or NCL = Total asset (Excluding Non Trade Investment) – Shareholders’ fund – Current liability Or NCL = Capital Employed – Shareholders’ Fund Capital Employed = NCL + Shareholders’ Fund Or Capital Employed = Total Asset(Excluding Non Trade Investment) – Current Liability Noncurrent asset (NCA) = Tangible asset less depreciation+ Intangible asset less amortization or Depreciation + Capital work in progress + Non Current Investment (Excluding Non Trade Investment) + Long term Loans & Advances + Deferred Tax Asset + Intangible Assets under Development + Other Non current Asset Total Asset = Non Current Asset (NCA) + Current Asset Net Asset or Shareholders’ fund (SHF) Or Proprietors’ Fund = Share capital + Reserve & Surplus + Money received against share warrant + Share application pending allotment Or SHF = Total asset – NCL ¬¬– Current liability (CL) Or SHF = NCA + Working capital – NCL Net Asset Or SHF = Total Asset – Total Liability Working Capital = Current Asset – Current Liability Note: Always remember, Non Trade Investment is not included while Calculating Total Asset of a Company. Depreciation or Amortization is subtracted From Tangible Asset & Intangible asset to calculate Total Asset. When accumulated Depreciation is given in the question, we should not subtract it from Fixed Asset (Tangible & Intangible) as it is already adjusted in Fixed Assets.

Class 12 Accounts

Financial Accounting Ratios

Financial Accounting Ratios & types of Accounting Ratio – Liquidity ratio, Profitability ratio, Turnover or Activity ratio, Solvency ratio

By admin, 3 yearsJune 23, 2022 ago