Management Accounting

# Liquidity Ratios:-

Current Ratio

Current Assets/Current Liabilities

Ideal Ratio – 2:1

Current Assets – Cash at bank, Cash in hand, Debtors, Bills Receivable,

Stock or inventory, Prepaid expenses, Short term advances, Marketable
securities, Accrued income, Advance payment of tax, TDS (Tax
Deducted at Service)

Current Liabilities – Bank overdraft, Creditors, Bills payable,

outstanding expenses, short term loans, Income tax payable, unclaimed
dividend, unearned income

Liquidity Ratio/Quick Ratio

Current Assets-(Stock-Prepaid Expenses)/Current Liabilities

Quick Assets/Current Liabilities

Ideal Ratio – 1:1

Absolute Liquid Ratio

Absolute Liquid Assets/Absolute Liquid Liabilities

Ideal Ratio – 0.50:1

Absolute Liquid Assets – Cash + Bank + Marketable Securities

Absolute Liquid Liabilities – Current Liabilities – Bank Overdraft

Question 1

Current assets 100000

Stock 50000
Working capital 60000

Current Ratio – 100000/40000 = 2.5:1

Quick Ratio – 50000/40000 = 1.25:1

Working Note:

Working capital = Current assets – Current liabilities

60000 = 100000 – CL

CL = 100000 – 60000

CL = 40000

Quick Assets = Current Assets – Stock

QA = 100000 – 50000

QA = 50000

Question 2

Debtors 2000
Bills Payable 10000
Inventory 30000
Bills Receivable 5000
Creditors 15000
Prepaid Expenses 5000
Outstanding Expenses 3000
Unclaimed Dividend 700
Marketable Securities 6000
Cash in Hand 2000
Cash at Bank 5000

Current Assets – 73000/28700 = 2.54:1

Quick Assets – 38000/28700 = 1.32:1

Absolute Liquid Ratio – 13000/28700 = 0.45:1

Working Note:

Current Assets – 20000 + 30000 + 5000 + 5000 + 6000 + 2000 + 5000

= 73000

Current Liabilities – 10000 + 15000 + 3000 + 700 = 28700

Quick Assets – 73000 - (30000 + 5000) = 38000

Absolute Liquid Assets – 2000 + 5000 + 6000 = 13000

Question 3

Inventory 70000
Debtors 31000
Creditors 32000
Cash at Bank 10000
Bills Receivable 15000
Provision for Taxation 15000
Bills Payable 29000
Marketable Securities 18000
Prepaid Expenses 3000
Accrued Income 5000
Bank Overdraft 13000
Current Ratio – 152000/89000 = 1.7:1

Quick Ratio – 79000/89000 = 0.88:1

Absolute Liquid Ratio – 28000/76000 = 0.36:1

Working Note:

Current Assets – 70000 + 31000 + 15000 + 18000 + 10000 + 3000 +

5000 = 152000

Current Liabilities – 32000 + 15000 + 29000 + 13000 = 89000

Quick Assets = 152000 – (70000 + 30000) = 79000

Absolute Liquid Assets = 10000 + 18000 = 28000

Absolute Liquid Liabilities = 89000 – 13000 = 76000

# Turnover Ratios:-

Stock Turnover Ratio

Cost of Goods Sold/Average Stock = Times

Stock Velocity

365 days or weeks or months/Stock Turnover Ratio

= Days or weeks or months

Debtors Turnover Ratio

Net Credit Sales/Average Debtors or Receivables = Times

Debtors Velocity

365 days or weeks or months/Debtors Turnover Ratio

= Days or weeks or months

Creditors Turnover Ratio

Net Credit Purchase/Average Creditors or Payables = Times

Creditors Velocity or Creditors Payment Period

365 days or weeks or months/Creditors Turnover Ratio

= Days or weeks or months

Question 4

Opening balance debtors 40000

Closing balance debtors 50000
Opening balance creditors 50000
Closing balance creditors 40000
Opening stock 30000
Closing stock 50000
Cash received from debtors 90000
Cash paid to creditors 60000
Cash sales 60000
Cash purchases 40000
Sales return 10000
Purchase return 5000

Stock Turnover Ratio – 75000/40000 = 1.87 Times

Stock Velocity – 365/1.87 = 195 days

Debtors Turnover Ratio – 75000/40000 = 1.87 Times

Debtors Velocity – 365/1.87 = 195 days

Creditors Turnover Ratio – 75000/42500 = 1.76 Times

Creditors Velocity – 365/1.76 = 207.38 days

Working Note:

Total Creditors

To bal. c/d 40000 By purchase 55000

To cash paid 60000 (Credit)
To purchase 5000 50000
return By bal. b/d
105000 105000

Total Debtors

To sales (Credit) 90000 By bal. b/d 40000

By cash received 90000
To bal. c/d 50000 By sales return 10000
140000 140000

Cost of Goods Sold – Opening Stock + Total Purchase – Closing Stock

= 30000 + (40000 + 55000) – 50000

= 75000

Average Stock – 30000+50000/2 = 40000

Average Debtors – 40000+50000-10000/2 = 40000

Average Creditors – 50000+40000-5000/2 = 42500