Liquid Ratio Or Quick Ratio Or Acid Test Ratio

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 =₹8,00,0005,00,000
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 

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