Tag: liquidity ratios

Questions Related to liquidity ratios

Which of the following items is not taken into account while computing quick ratio?

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  1. Cash

  2. Bank Balance

  3. Bank overdraft

  4. Sundry creditors

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Correct Option: C
Explanation:

The quick ratio is a financial ratio used to gauge a company's liquidity. The quick ratio is also known as the acid test ratio. The quick ratio compares the total amount of cash and cash equivalents + marketable securities + accounts receivable to the amount of current liabilities.

Which of the following liabilities are taken into account for acid test ratio?
(i) Trade creditors
(ii) Bank overdraft
(iii) Cash credit
(iv) Outstanding expenses

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  1. i & ii

  2. i & iv

  3. i, ii, iii & iv

  4. ii, iii & iv

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Correct Option: C
Explanation:

Acid test ratio = quick assets / current liabilities. All current liabilities are considered while calculating acid test ratio.

The excess of current assets over current liabilities is called as ___________.

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  1. Net tangible worth

  2. Net worth

  3. Gross working capital

  4. Net working capital

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Correct Option: D
Explanation:

The formula for calculation of "Net working capital" is as follows:

Net working capital = Total current assets - Total current liabilities
Net working capital is the aggregate amount of all current assets minus current liabilities. It is used to measure the short-term liquidity of a business, and can also be used to obtain a general impression of the ability of a company management to utilize assets in an efficient manner.

What is the meaning of current ratio of less than one?

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  1. Current liabilities < Current assets

  2. Fixed assets > Current assets

  3. Current assets < Current liabilities

  4. Share capital > Current assets

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Correct Option: C
Explanation:

Current ratio is the measure of liquidity of a company at the certain date. A high current ratio can be signs of problems in managing working capital. When current ratio is low and Current liabilities exceeds current assets, the company may have problems in meeting its short term obligations.

Suppliers and Creditors of a firm are interested in ______.

elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

  1. Profitability Position

  2. Liquidity Position

  3. Market Share Position

  4. Debt Position

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Correct Option: B
Explanation:

Liquidity position signify the short term solvency position of the company. Suppliers and creditors are short term liabilities, they are interested to know the liquidity position.

Which of the following ratios is termed as 'acid test ratio' or 'quick ratio'?

elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

  1. Fixed assets Ratio

  2. Current Ratio

  3. Liquidity ratio

  4. Debt-Equity ratio

Show answer
Correct Option: C
Explanation:

Liquidity ratio measures the company's ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio and quick ratio. It also indicates cash flow positioning. It is also called as acid test ratio and quick ratio.

Quick ratio is calculated by using the following formula ___________________.

elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

  1. $\cfrac { Cash+near  cash+debtors - Inventories }{ Current\quad liabilities } $

  2. $\cfrac { Cash+debtors }{ Current\quad liabilities } $

  3. $\cfrac { Cash }{ Current\quad liabilities } $

  4. $\cfrac { Cash+near\quad cash+debtors }{ Current\quad assets } $

Show answer
Correct Option: A
Explanation:

Quick ratio is calculated by dividing liquid current assets by total current liabilities. Liquid current assets include cash, marketable securities and receivables. Cash includes cash in hand and cash at bank.

If the current ratio is $2 : 1$ and working capital is $Rs. 60,000$, what is the value of the current assets?

elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

  1. $Rs. 60,000$

  2. $Rs. 1,00,000$

  3. $Rs. 1,20,000$

  4. $Rs. 1,80,000$

Show answer
Correct Option: C
Explanation:

Current Ratio = Current Assets (C.A)/ Current Liabilities (C.L)  = $2/1$

So, CA= $2$ CL

Now, Working Capital = Current Assets(C.A) minus Current Liabilities (C.L) = $Rs.60000$
So, C.A - C.L = $60000$
       $2$ C.L-CL = $60000$
        C.L = $Rs. 60000$

Now, C.A = $2$ x $60000$ = $Rs. 120000$

The current ratio is _________________________.

elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

  1. $\cfrac { Current\quad assets }{ Current\quad liabilities } $

  2. $\cfrac { Cash+near\quad cash+debtors }{ Current\quad liabilities } $

  3. $\cfrac { Liquid\quad assets }{ Current\quad liabilities } $

  4. $\cfrac { Current\quad liabilities }{ Current\quad assets } $

Show answer
Correct Option: A
Explanation:

Using the Balance Sheet, the current ratio is calculated by dividing current assets by current liabilities:

Which one of the following is not a leverage ratio?

elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

  1. Total debt ratio

  2. Debt-Equity ratio

  3. Interest coverage ratio

  4. Quick ratio

Show answer
Correct Option: D
Explanation:

Quick ratio is a liquidity ratio or short term solvency ratio. Whereas the remaining three ratios are leverage ratios.