Ratio Analysis - Current Ratio

Classification of Accounting Ratio

Types of ratios are given below:
Liquidity Ratios
Leverage Ratio
Turnover Ratio
Profitability Ratio

1. MANAGEMENT ACCOUNTING Ratio Analysis By: Smt.UMA MINAJIGI REUR HEAD, DEPT. OF COMMERCE & Management Smt. V G Degree College for Women, Kalaburagi

2. MANAGEMENT ACCOUNTING Ratio Analysis Liquidity ratios - 1

3. An analysis of financial statements with the help of ratio is called Ratio Analysis. Ratio refers to Numerical or Quantitative relationship between two items. What are Financial Ratios? Financial ratios are created with the use of numerical values taken from  financial statements  to gain meaningful information about a company. The numbers found on a company’s financial statements –  balance sheet ,  income statement , and  cash flow statement  – are used to perform  quantitative analysis  and assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more.

4. Ratio analysis is a process used for the calculation of financial ratios or in other words, for the purpose of evaluating the financial wellbeing of a company. The values used for the calculation of financial ratios of a company are extracted from the financial statements of that same company. Ratio analysis can be defined as the process of ascertaining the financial ratios that are used for indicating the ongoing financial performance of a company using few types of ratios such as liquidity, profitability, activity, debt, market, solvency, efficiency, and coverage ratios and few examples of such ratios are return on equity, current ratio, quick ratio,  dividend payout ratio , debt-equity ratio, and so on.

5. Classification of Accounting Ratio Types of ratios are given below: Liquidity Ratios Leverage Ratio Turnover Ratio Profitability Ratio

6. Liquidity Ratios This type of ratio helps in measuring the ability of a company to take care of its short-term debt obligations. A higher liquidity ratio represents that the company is highly rich in cash. The types of liquidity ratios are: – Current Ratio or Working Capital Ratio Quick Ratio or Liquidity Ratio or Acid Test Ratio Absolute Liquid Ratio or Cash Ratio Stock to Working Capital Ratio

7. 1. Current Ratio:   The current ratio is the ratio between the current assets and current liabilities of a company. The current ratio is used to indicate the liquidity of an organization in being able to meet its debt obligations in the upcoming twelve months. A higher current ratio will indicate that the organization is highly capable of repaying its short-term debt obligations. Current Ratio = Current Assets / Current Liabilities Current Assets: Current Assets means cash and those assets which can be converted into cash within one year in ordinary course of business. Current Liabilities: Current Liabilities are those which are to be paid by the firm in one year.  

8. Current Ratio:   Current Ratio = Current Assets / Current Liabilities Interpretation of Current Ratio: Standard or Ideal Current Ratio is 2:1 If current ratio is less than the standard ratio of 2:1, it indicates that the concern does not enjoy the sufficient liquidity and shortage of working capital. If current ratio is more than the standard ratio of 2:1, it indicates that the concern has sufficient liquidity.  

9. Current Assets I Current Investments Marketable Securities II Inventories Stock III Trade Receivable Sundry Debtors Bills Receivable IV Cash & Cash Equivalent Cash Cash at Bank V Short Term Loans & Advances Loans & Advances to Staff Money at call or short notice Prepaid Expenses VI Other Current Assets Outstanding Incomes Not included in Current Assets: Loose Tools (Fixed Assets) Preliminary expenses Fictitious Assets Trade Investments (long Term) Doubtful debtors Any Current Assets hypothecated Any current asset which is not realisable Discount on issue of shares Discount on issue of Debentures Other deferred expenses such as Advertisement Suspense A/c

10. Current Liabilities I Short Term Borrowings Bank Overdraft Short Term Loans & Advances Deposits (Cr.) II Trade Payable Sundry Creditors Bills Payable III Other Current Liabilities Income tax payable Excise duty or VAT payable Outstanding expenses Income received in advance Unclaimed dividend Interest due or payable Instalment payment on long term loans IV Short Term Provisions Provisions for taxation Proposed dividend Provisions for salaries, wages, bonus etc ( i.e , long term loan due for payment in current year is current liability) Any amount payable in short period The current ratio measures its short term solvency i.e , its ability to meet short term obligations.

11. 1. From the following information calculate current ratio. Stock Rs. 60,000, Debtors Rs. 54,000, Cash Rs. 20,000, Bank Rs. 40,000, Bills receivable Rs. 24,000, Creditors Rs. 70,000, Bill Payables Rs. 24,000, Interest receivable Rs. 1,000, Prepaid expenses Rs. 1,000, Debentures Rs.1,00,000, Provision for taxation Rs. 6,000.   Solution:

12. Current Assets I Current Investments Marketable Securities II Inventories Stock 60,000 III Trade Receivable Sundry Debtors 54,000 Bills Receivable 24,000 78,000 IV Cash & Cash Equivalent Cash 20,000 Cash at Bank 40,000 60,000 V Short Term Loans & Advances Prepaid Expenses 1,000 1,000 VI Other Current Assets Interest Receivable 1,000 1,000 Current Assets 2,00,000 1. From the following information calculate current ratio. Stock Rs. 60,000, Debtors Rs. 54,000, Cash Rs. 20,000, Bank Rs. 40,000, Bills receivable Rs. 24,000 , Creditors Rs. 70,000, Bill Payables Rs. 24,000, Interest receivable Rs. 1,000, Prepaid expenses Rs. 1,000 , Debentures Rs.1,00,000, Provision for taxation Rs. 6,000. Calculation of Current Assets:

13. Current Liabilities II Trade Payable Sundry Creditors 70,000 Bills Payable 24,000 IV Short Term Provisions Provisions for taxation 6,000 Current Liabilities 1,00,000 1. From the following information calculate current ratio. Stock Rs. 60,000, Debtors Rs. 54,000, Cash Rs. 20,000, Bank Rs. 40,000, Bills receivable Rs. 24,000, Creditors Rs. 70,000, Bill Payables Rs. 24,000 , Interest receivable Rs. 1,000, Prepaid expenses Rs. 1,000, Debentures Rs.1,00,000, Provision for taxation Rs. 6,000. Calculation of Current Liabilities:   = 2:1  

14. 2. Calculate current assets from the following information. Current ratio = 4, Current Liabilities = 1,20,000   Solution:       By cross multiplication:

15. 3. From the following information calculate current ratio. Stock Rs. 2,00,000, Debtors Rs. 3,00,000, Cash Rs. 3,00,000, Creditors Rs. 3,20,000, Bill Payables Rs. 60,000, Outstanding expenses Rs. 20,000.   Solution:    

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