Explain the quick ratio - liquidity ratios, Managerial Accounting

Assignment Help:

Quick ratio

Meaning: this ratio establishes a relationship among quick assets and current liabilities

Objective: the objective of commuting this ratio is to calculate the ability of the firm to meet its short term obligation as and when due without relying upon the realization of stock

Components: there are two components of this ratio which are as under:

a) Quick assets: which means those current assets which can be converted into cash immediately or at a short notice without a loss of value and include the

b) Current liabilities

Computation: this ratio is computed by separating the quick assets by the current liabilities. This ratio is usually expressed as a pure ratio e.g., 1:1. In the form of a formula this ratio may be expressed as under

Interpretation: it shows rupees of quick assets available for each rupee of current liability. Traditionally a quick ratio of 1: is considered to be a satisfactory ratio. Though this traditional rule should not be used blindly since a firm having a quick ratio of more than 1 may not be meeting its short term obligations in time if its current assets consist of doubtful and slow paying debtors while a firm having a quick ratio of less than 1 may be meeting its short term obligations in time because of its very efficient inventory management.

Significance of quick ratio

The quick ratio is very useful in measuring the liquidity position of a firm. It measures the firm capacity to pay off current obligation immediately and is a more rigorous test of liquidity than the current ratio. It is used as a complementary ratio to the current ratio

 


Related Discussions:- Explain the quick ratio - liquidity ratios

What is master budget, What is Master budget Financial budget are conce...

What is Master budget Financial budget are concerned with cash receipts and disbursements working capital. Several functional budgets are integrated into master budget. This bu

Explain the cost according to controllability, Explain the cost According t...

Explain the cost According to controllability: Controllable cost: this is a cost which can be inclined by the action of a specified member of an undertaking. The organization

Critique of performance measurement, Critique of Performance Measurement ...

Critique of Performance Measurement This section brings together material from preceding data in this lesson in order to provide a critical appraisal of performance measurement

Cost estimation, engineering method of cost estimation

engineering method of cost estimation

How does that relate to the modern epidemic on obesity, Why is corn so freq...

Why is corn so frequently used in typical American foods? In what forms does it take when being part of those foods? How does that relate to the modern epidemic on obesity?

Types of costs, Types of Costs In short run, costs can be of three gene...

Types of Costs In short run, costs can be of three general kinds: Fixed Cost: Total fixed costs stay constant as volume differs in the relevant range of production. Fixe

Evaluate marginal cost, 1. If the marginal cost of producing a good is incr...

1. If the marginal cost of producing a good is increasing as a firm produces more of the good, then which of the following must be true? a. AFC is rising               b. AVC i

Capital budgeting, A firm wants to buy a new machine and the following quot...

A firm wants to buy a new machine and the following quotation has been received. Cost of machine US$100 000 Freight and insurance US$5 000 The new machine will last for five

Prepare an estimation of working capital, Prepare an estimation of working ...

Prepare an estimation of working capital needs from the subsequent information of a trading relates with: (a) Projected Annual Sales 1,00,000

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd