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Liquid Ratio Or Quick Ratio Or Acid Test Ratio
The ratio which establishes the relationship between liquid assets and current liabilities is called liquid ratio.
The quick ratio is a measure of the instant debt-paying capacity of the business enterprise.
A quick ratio of 1: 1 is considered good/favorable for a company.
The liquid ratio is also known as Acid test Ratio or Quick ratio.
It is another ratio to test the short-term solvency of the concern.
The objective of computing the liquid ratio is to assess whether the business enterprise would be able to meet its short-term financial obligations(Current Liabilities).
Liquid Ratio Or Quick Ratio Or Acid Test Ratio
Liquid Assets?
Liquid assets are those assets that can be quickly and easily converted into cash at a reasonable price. It includes the following:
Cash in hand,
Cash at Bank,
Cheque in hand
Draft in hand
Trade Receivables,
Short term investment,
Current investment,
Marketable Securities,
Liquid Assets = All Current Assets Except Inventories and Prepaid expenses, advance payment of tax.
Current Liabilities?
Current Liabilities are obligations or debts that are payable within a period of one year. It includes the following:
Trade Payables,
Bank overdraft,
Provision for tax,
Outstanding expenses,
Cash Credit
Short-term borrowings.
Trade Payables include Sundry Creditors and Bills Payables.
Liquid Ratio Or Quick Ratio Or Acid Test Ratio
Formula for the Liquid ratio:
Liquid Ratio Or Quick Ratio Or Acid Test Ratio
Illustrations For Liquid Ratio:
Illustration 1.
Calculate liquid ratio from the following :
Liquid Assets ₹2,00,000
Current Liabilities ₹ 2,00,000
Solution:
Liquid ratio=₹2,00,000/₹2,00,000
Current Ratio= 1.1
Illustration 2.
Calculate liquid ratio from the following :
Sundry debtors ₹4,00,000
Inventories ₹1,60,000
Marketable securities ₹ 80,000
Cash in hand ₹1,20,000
Prepaid expenses ₹40,000
Bills payables ₹ 80,000
Sundry creditors ₹2,60,000
10%Debentures ₹ 5,00,000
Outstanding Expenses ₹ 60,000
Solution:
Liqiud Assets =Sundry debtors +Marketable securities +Cash in hand .
Liqiud Assets = ₹4,00,000+₹80,000+₹1,20,000
Liqiud Assets = ₹6,00,000
Current Liabilities=Bills payables +Sundry creditors +Outstanding Expenses
Current Liabilities=₹80,000 +₹2,60,000 +₹60,000
Current Liabilities=₹4,00,000
Liquid ratio= ₹6,00,000/₹4,00,000
Liquid Ratio= 1.5:1
Illustration 3.
Calculate Quick ratio from the following :
Trade Receivable ₹4,00,000
Inventories ₹1,00,000
Marketable securities ₹ 80,000
Cash in hand ₹1,20,000
Cash at Bank hand ₹80,000
Prepaid expenses ₹40,000
Bills payables ₹ 80,000
Sundry creditors ₹2,60,000
Outstanding Expenses ₹60,000
Provision for tax ₹ 40,000
Solution:
Liqiud Assets =Trade Receivable +Marketable securities +Cash in hand+ Cash at Bank
Liqiud Assets = ₹4,00,000+₹80,000+₹1,20,000+₹80,000
Liqiud Assets = ₹6,80,000
Current Liabilities=Bills payables +Sundry creditors +Outstanding Expenses +Provision for tax
Current Liabilities=₹80,000 +₹2,60,000 +₹60,000+₹40,000
Current Liabilities=₹4,40,000
Liquid ratio= ₹6,80,000/₹4,40,000
Liquid Ratio= 1.54:1
Illustration 4.
Calculate Liquid ratio from the following :
Total Current Assets ₹5,00,000
Inventories ₹2,00,000
Current Liabilities₹ 3,00,000
Solution:
Liquid Assets = Total Current Assets – Inventories
Liquid Assets = ₹5,00,000-₹2,00,000
Liquid Assets = ₹3,00,000
Current Liabilities=₹3,00,000
Liquid ratio= ₹3,00,000/₹3,00,000
Liquid Ratio= 1:1
Illustration 5.
Calculate Liquid ratio from the following :
Current Ratio 2:1
Total Current Assets ₹5,00,000
Inventories ₹1,00,000
Solution:
Current Ratio= Current Assets/Current Liabilities
2/1=₹5,00,000/Current Liabilities
2Current Liabilities=₹5,00,000
Current Liabilities=₹5,00,000/2
Current Liabilities=₹2,50,000
Liquid Assets = Total Current Assets – Inventories
Liquid Assets = ₹5,00,000-₹1,00,000
Liquid Assets = ₹4,00,000
Current Liabilities=₹2,50,000
Liquid ratio= ₹4,00,000/₹2,50,000
Liquid Ratio= 1.6:1
Illustration 6.
Calculate Liquid ratio from the following :
Current Ratio 2:1
Current Liabilities=₹4,00,000
Inventories ₹3,00,000
Solution:
Current Ratio= Current Assets/Current Liabilities
2/1=Current Assets/₹4,00,000
Current Assets=₹4,00,000×2
Current Assets=₹8,00,000
Liquid Assets = Current Assets – Inventories
Liquid Assets = ₹8,00,000-₹3,00,000
Liquid Assets = ₹5,00,000
Current Liabilities=₹4,00,000
Liquid ratio= ₹5,00,000/₹4,00,000
Liquid Ratio= 1.25:1
Illustration 7.
Calculate Liquid/Quick/Acid Test Ratio from the following :
Current Assets ₹8,00,000
Working Capital₹5,00,000
Inventories ₹3,00,000
Solution:
Working Capital=Current Assets-Current Liabilities
₹5,00,000=₹8,00,000-Current Liabilities
Current Liabilities =₹8,00,000–5,00,000
Current Liabilities =₹3,00,000
Current Assets ₹8,00,000
Inventories ₹3,00,000
Liquid Assets = Current Assets – Inventories
Liquid Assets = ₹8,00,000-₹3,00,000
Liquid Assets = ₹5,00,000
Liquid ratio= ₹5,00,000/₹3,00,000
Liquid Ratio= 1.67:1