Accounts Notes: Quick ratio or Acid Test ratio

Tuesday, 12 April 2011

Quick ratio or Acid Test ratio

Quick ratio or Acid Test ratio = Quick Asset
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Quick liability

Notes : -
• Quick Asset = Current Asset – Stock
• Quick Liability = Current liability – Cash credit, Bank borrowings, OD and other Short term Borrowings.
• Secured loan is a current liability and also come under cash credit
• Sundry debtors considered doubtful should not be taken as quick asset.
• Creditors for capital WIP is to be excluded from current liability.
• Current asset can include only marketable securities.
• Loans to employees in asset side are long term in nature and are not part of current assets.
• Provision for gratuity is not a current liability.
• Gratuity fund investment is not a part of marketable securities.
• Trade investments are not part of marketable securities.

Remarks : -
• Higher the current ratios better the liquidity position.

C) Capital structure ratios : -

1) Debt equity ratio = Debt = External Equity
(or) Leverage ratio Equity Internal Equity
= Long term debt = Share holders fund
Long term fund Long term fund

2) Proprietary ratio = Proprietary fund
Total Assets

3) Total Liability to Net worth ratio = Total Liabilities
Net worth

4) Capital gearing ratio = Preference share capital + Debt
Equity – Preference share capital

Notes : -
• Share holders fund (or) Equity (or) Proprietary fund (or) Owners fund (or) Net worth = Equity share + Preference share + Reserves and surplus – P & L a/c – Preliminary Expenses.
• Debt (or) Long term liability (or) Long term loan fund = Secured loan (excluding cash credit) + unsecured loan + Debentures.
• Total asset = Total assets as per Balance sheet – Preliminary expenses.
• Total liability = Long term liability + Current liability (or) short term liability
• Long term fund = Total asset – Current liability = Share holders fund + long term loan fund.

Remarks : -
• In debt equity ratio higher the debt fund used in capital structure, greater is the risk.
• In debt equity ratio, operates favorable when if rate of interest is lower than the return on capital employed.
• In total liability to Net worth Ratio = Lower the ratio, better is solvency position of business, Higher the ratio lower is its solvency position.
• If debt equity ratio is comparatively higher then the financial strength is better.