Calculation of liquidity ratios current ratio and acid-test, Financial Accounting

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	Calculation of Liquidity ratios Current Ratio and Acid-Test Ratio -

		2008	2009	2010
A	Inventory	1388168	2030972	2651760
B	Current Assets	1784275	2353271	2905145
C	Current Liabilities	992683	1340291	1743763
D	Administrative Expenses	1338918	1797197	2319148
E	Selling Expenses	89749	123639	165962
F	Operational Expenses	1428667	1920836	2485110


	Current Ratio (B / C)	1.80	1.76	1.67

	Acid - Test Ratio [(B-A) / C] =	0.40	0.24	0.15

	Defensive Interval period / ratio (in days) [B / (F / 360)]	450	441	421

	*Assumption - We have assumed the operational expenses to include "Administrative expenses" and "Selling Expenses" and a year to be of 360 days.*

As shown by the ratios above all liquidity ratios i.e. Current Ratio, Acid Test ratio and Defensive Interval period are showing a declining trend from 2008 to 2010. This might be due to the global recession during that period. None of the ratios are increasing or improving after 2008 till 2010.

The liquidity position of the firm is not good as the best measure of liquidity i.e. the quick ratio is also declining continuously in 2009 and 2010 vis-à-vis the previous years.

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