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.
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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 significa...
Step-by-step explanation:
• 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
Students often lose marks by skipping steps, writing incomplete explanations, or misunderstanding keywords used in the question.
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