2. Liquidity ratios are the ratios that measure the ability of a
company to meet its short term debt obligations.
These ratios measure the ability of a company to pay off its
short-term liabilities when they fall due.
The important ratios in measuring short term solvency are:
1. current ratio
2. quick ratio
3.absolute liquid ratio

3. The current ratio is a financial ratio that measures whether or
not a firm has enough resources to pay its debts over the next
12 months.
It compares a firm's current assets to its current liabilities.
current ratio = Current asset
_______________
Current liability

4. It is also known as Acid test ratio, or quick ratio, or
liquid ratio.
It measures the ability of a company to use its
near cash or quick assets to extinguish or retire its
current liabilities immediately.
Quick assets include those current assets that
presumably can be quickly converted to cash at
close to their book values.
QUICK RATIO = ( CURRENT ASSET- INVENTORY-
ACCOUNTS RECEIVABLE)
____________________________________
_CURRENT LIABILITY

5. The absolute liquidity ratio is used
to calculate what the company's net
worth is.
It is the ratio of absolute liquid
assets to current liabilities.
This ratio is used to determine the
absolute liquid position of a firm or
company.

6. It measure a company's ability to generate
earnings relative to sales, assets and equity.
These ratios assess the ability of a company to
generate earnings, profits and cash flows relative
to relative to some metric, often the amount of
money invested.
Major profitability ratio are:
1.Gross profit margin
2. Net profit margin
3.Cash profit ratio
4.Return on total asset
5. Return on shareholder's fund

7. The ratio measures the gross profit
margin on the total net sales made
by the company.
Gross profit margin =
cost of goods sold x 100
_____________________
Sales

8. This ratio is designed to focus attention on the
net profit margin arising from the business
operation before interest and tax is deducted.
Net profit margin =
net profit after tax x 100
_____________________
Sales

9. Cash profit ratio measures the cash
generation in the business as a result of
the operations expressed in the sales.
Cash profit ratio =
cash profit x 100
_________________
Sales

10. This ratio indicates the efficiency of
utilisation of assets in generating
revenue.
Return on total asset =
Net profit after tax x 100
_____________________
Total assets

11. Scope :
It is suitable only for such business concerns which are engaged in
manufacturing, production, mining or providing some service (e.g.
bus company electric supply company etc.)
It is suitable for all businesses - manufacturing, production or even
in marketing only.

12. Pre-determined and historical accounting
In cost accounting, the expenditure to be incurred is
estimated and standard cost of product is found. Thus, it
act as a pre-determined process.
In Financial accounting, accounting is done after the
expenditure has already been incurred and not prior to
that. So it is historical accounting.

13. Transactions related with production
activities only are accounted for in this
method. Donations, dividend received,
etc. are not taken into account as these
are not related with production.
All economic transactions are taken into
account, whether these are related with
production or not.

14. By cost accounting the price of the product can
be fixed more accurately in a scientific manner.
In the absence of information about cost, the
selling price fixed by this method may be
misleading.

15. Profit calculated by this method expresses the
result of production activities.
Profit calculated by this method expresses the
profit of the organization.

16. Full and correct information about the cost,
per unit cost, various elements of cost, etc. of
the product is made available in cost
accounting.
Financial accounting does not give such
detailed and correct information.