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Accounting Ratios — Accountancy STD 12 Commerce — Question

CBSE BoardEnglish MediumSTD 12 CommerceAccountancyAccounting Ratios6 Marks
Question
Distinguish between Current Ratio and Quiek Ratio.
✓

Answer

Distinction between Current Ratio and Quick Ratio
Basis of Distinction
Current Ratio
Quick Ratio(or Liquid Ratio)
1.
Relationship
It establishes a relationship between current Assest and Current Liabilities.
It establishes a relationship between Liquid Assets and Current Liabilities.
2.
Formula for computation
 Current Ratio $=\frac{\text{Current Assets}}{\text{Current Liabilities}}$ Quick Ratio $=\frac{\text{Liquid Assets}}{\text{Current Liabilities}}$
3.
Obejctive
It measures the ability of the firm to meet its current liabilities within 12 months from the date of balance Sheet or within the period of operting cycle.
It measures the ability of the firm to meet its current liabilities immediately or within a month.
4.
Ideal Ratio
Current Ratio of 2 : 1 is Considered as an ideal ratio.
Quick Ratio of 1 : 1 is Considered as an ideal ratio.
5.
True Measurement
It is not a true measurement of short-term financial position of the firm as it may include a large amount of inventoires which may not be quickly convertible in to cash.
It removes this shortcoming of current ratio by excluding the amount of inventories.
 

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