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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