Question

The Balance Sheet of Glassworks Ltd. as at 31st March, 2015 is given below:

| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
| Share Capital | 10 | Goodwill | 6 |
| Reserves and Surplus | 3 | Fixed Assets | 12.60 |
| P&L Account | 2.50 | Investments (short-term) | 1 |
| Secured Loans | 8 | Stock | 3.60 |
| Creditors | 2.50 | Debtors | 2.40 |
| Bank Overdraft | 1.50 | Advances | 0.50 |
| Provision for Taxation | 0.50 | Cash in Hand | 0.90 |
| | | Cash at Bank | 1 |
| | 28 | | 28 |

Answer 1

(a) Current Ratio = Current Assets / Current Liabilities

= 9.4/4.5 = 2.09

As compared to the ideal 2:1, a ratio of 2.09 indicates better liquidity position of the company.

(b) Liquid Ratio = Liquid Assets / Current Liabilities

= 5.8 /4.5= 1.29

Alternatively, the bank overdraft can be deducted from current liabilities to calculate quick liabilities. The answer in this case will be:

= 5.8/ 3 = 1.93

(c) Absolute Liquidity Ratio = Absolute Liquid Assets / Current Liabilities

= 2.9 / 4.5 = 0.64.