STANDARD NORM OF THE CURRENT RATIO - Accounts and Finance for Managers

The ideal norm is that 2:1; which means that every one rupee of current liability is appropriately covered by Two rupees of current assets.

Implication of High Ratio of Current Assets over the Current Liabilities

High ratio leads to greater the volume of current assets more than the specified norm denotes that the firm possess excessive current assets than the requirement portrays idle funds invested in the current assets.

Limitation of the Current Ratio

Standard of Current Ratio

Under this ratio, the current assets are equally weighed each other to match the current liabilities. Under the current ratio, One rupee of cash is equally weighed at par with the one rupee of closing stock, but the closing stock and prepaid expenses cannot be immediately realized like cash and marketable securities.

Acid Test Ratio

It is a ratio expresses the relationship in between the quick assets and current liabilities. This ratio is to replace the bottleneck associated with the current ratio. It considers only the liquid assets which can be easily translated into cash to meet out the financial commitments.

AcidTest Ratio (Quick AssetsRatio)=current assets/current Liabilities

AcidTest Ratio

Standard norm of the ratio;
The ideal norm is that 1:1 means; One rupee of current liabilities is matched with one rupee of quick assets.

Super Quick Assets Ratio

It is the ratio which establishes the relationship in between the super quick assets and quick liabilities of the firm.

The super quick assets are nothing but the current assets which can be more easily converted into cash to meet out the quick liabilities.

The super quick liabilities are the current liabilities should have to be met out at faster pace within shorter span in duration.
Super Quick Assets = Cash + Marketable Securities .
Super Quick Liabilities= Current Liabilities Bank Over Draft

Super Quick Assets Ratio=Super Quick Assets/Super Quick Liabilities

Standard norm of the ratio

Higher the ratio is the better the position of the firm

Illustration

From the following calculate current ratio
Current Assets:
Current Assets

Current Assets

Current Liabilities:
Current Liabilities

current ratio = Rs.8,00,000

Current Assets = Rs. 4,00,000

Current Liabilities = 2

Illustration

The firm satisfies the standard norm of the current asset ratio and Liquid assets ratio M/s Shanmuga &Co

Balance sheet as on dated 31st march 2005

current ratio = Rs.32,000

Current Assets =Rs. 16,000

Current Liabilities =2

It satisfies the standard norm of the current asset ratio

Liquid assets ratio = Rs.19,600

Quick assets = Rs. 16,000

Current Liabilities = 1.225

The firm financial position satisfies the standard norm of the Liquid assets ratio.

Illustration

Liquid Assets Rs. 65,000; Stock Rs.20,000; Pre paid expenses Rs. 5,000; Working capital Rs. 60,000
Calculate current assets ratio and liquid assets ratio
For the computation of current assets ratio, current assets volume must be known. It is not available in our problem, instead the liquid assets and prepaid expenses are given together which will facilitate to find the total volume of current assets.
Current Assets= Liquid Asset + Prepaid expenses + closing stock= Rs.65,000 + Rs. 5,000+20,000= Rs.90,000
The next step is to find out the current liabilities. The volume of current liabilities could be found out through the available information of working capital.
Net working capital= Current Assets- Current Liabilities
Rs. 60,000 = Rs. 70,000 - Current liabilities
Current liabilities = Rs. 90,000 - Rs. 60,000= Rs. 30,000
From the above, the current ratio could be found out

Current Ratio=90,000+30,000

The firm satisfies the more than the norm of the current ratio. It means that the firm keeps excessive current assets more than that of requirement.

Quick Assets Ratio=Rs. 65,000/Rs.30, 000=2.17

The firm keeps more liquid assets than that of the specified norm means that excessive liquid assets are held by the firm than the requirement in the form of idle not productive in utility.

Illustration

The current ratio of Bicon Ltd. is 4.5 :1 and liquidity ratio is 3:1 stock is Rs. 6,00,000 Find out the current liabilities.
To find out the volume of current liabilities, initially the share of closing stock should be found out in the total of current assets.
Share of stock =Current Assets Ratio – Liquid Assets Ratio=4.5-3.0=1.5
Share of the stock=1.5

If the share of the stock is 1.5 which amounted Rs. 6,00,000
What is the volume of current liabilities for the ration of 1?

Current Liabilities=Rs. 6,00,000/1.5= 4,00,000


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