Current Ratio Homework Help, Tutoring
Current Ratio Assignment Help, Current Ratio Tutor Help:
Current ratio:
One of the most commonly used ratios to measure the short term liquidity position
of a business is the current ratio. It measures the ability of a business to pay
its short term obligations (generally less than a year) with its short-term resources.
The current ratio is computed as:
Current Assets
Current Liabilities
Current Liabilities
Current Assets include inventories, sundry debtors, cash and bank balances, receivables/accruals,
loans and advances, disposable investments, etc.
Current Liabilities include creditors for goods and services, short-term loans,
bank overdraft, cash credit, outstanding expenses, provision for taxation, proposed
dividend, unclaimed dividend, etc.
A current ratio of 2 to 1 is generally considered good/acceptable. However, this
depends more on the type of industry in which the company operates. A ratio of less
than 1 indicates that the company does not have enough liquid assets to settle its
current obligations. While a ratio of less than 1 is definitely not a good sign
for the business, it does not indicate that the company will be bankrupt as it may
still have alternative sources of finance to tap to pay its obligations. Current
ratio also provides an indication of the efficiency of the operating cycle of the
business. In interpreting the current ratio care should be taken in looking into
composition of current assets. A firm which has a large amount of cash and account
receivable is more liquid than a firm which has high amount of inventories in its
current assets, though both the firm may have the same current ratio. To overcome
this is a more stringent form of liquidity ratio referred to as quick ratio cab
be calculated.
An Example
Compute Current Ratio from the information given below:
| Current assets: | Current liabilities: | ||||
| Inventories | $20,000 | Accounts payable | $18,000 | ||
| Sundry debtors | 5,000 | Short-term loan | 15,000 | ||
| Cash on hand | 12,000 | Bank overdraft | 5,000 | ||
| Cash at bank | 8,000 | Outstanding expenses | 3,000 | ||
| Accounts receivables | 35,000 | Provision for taxation | 10,000 | ||
| Short-term investments | 15,000 | Proposed dividends | 12,000 | ||
| 95,000 | 63,000 | ||||
|
|
|||||
| Current ratio: | Current assets / Current liabilities | ||||
|
95,000 / 63,000
1.51 |
|||||
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