Liquidity Ratios are an integral part of financial statement analysis. These are various measures to find or to ascertain the firm’s ability to meet the short term expenses or liabilities and convertibility to liquid assets (for further reading click the link) into cash on requirement. Copy the link given below and paste it in new browser window to get more information on Liquidity Ratio:- http://www.transtutors.com/homework-help/accounting/financial-statement-analysis-liquidity-ratios/

1. Liquidity Ratio

2. Liquidity
 The degree to which an asset can be quickly bought or sold in the
market without affecting its value. In accounting terms, liquidity refers to
the ease or smoothness at which the firm/ company is able to meet its
financial obligations with the given amount of assets (liquid).

3. Liquidity Ratio
 Liquidity ratios are an integral part of financial statement analysis.
These are various measures to find or to ascertain the firm’s ability to
meet the short term expenses or liabilities and convertibility to liquid
assets (for further reading click the link) into cash on requirement. This is
calculated or found by comparing the company’s liquid assets with its short
term liabilities. There are various liquidity ratios that we will study:
 Cash ratio
 Current ratio
 Acid test ratio

4. Liquidity
v/s
Solvency

5. BASIS FOR COMPARISON LIQUIDITY SOLVENCY
Meaning
Liquidity implies the measure of
the ability of the firm to cover its
immediate financial obligations.
Solvency means the firm's ability
of a business to have sufficient
assets to meet its debts as they
fall due for payment.
Obligations Short term Long term
Describes
How easily the assets can be
converted into cash.
How well the firm sustain itself
for long time.
Ratio
Current ratio, acid test ratio,
quick ratio, etc.
Debt to equity ratio, interest
coverage ratio, etc.
Risk Low High

6. Current Ratio
Current ratio is the company’s ability to meet its current obligations from the
current assets.
The ideal current ratio is 2:1.
Formula: Current Assets/ Current Liabilities

7. Acid Test Ratio
 Acid test ratio is an indicator of the short term liquidity of the company. It
measures company’s ability to meet the short term obligations with the
most liquid assets
 Acid Test ratio= (current assets-inventories)/current liabilities
 The ideal acid test ratio is 1:1.

8. Cash Ratio
 The cash ratio is the value of marketable securities and cash and cash
equivalents divided by liabilities of the company.
 Formula:
Cash ratio = (cash+ cash equivalents+ invested funds)/current liabilities

9. Hey Friend,
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link given below or copy it from the description of this PPT and open it in a new browser window.
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10. Hey Friend,
This was just a summary on Liquidity Ratio. For more detailed information on this topic, please type the
link given below or copy it from the description of this PPT and open it in a new browser window.
www.transtutors.com/homework-help/accounting/financial-statement-analysis-liquidity-ratios/