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Home Accounting Ratios Analysis/Financial Ratios Analysis Analysis of Short Term Financial Position or Test of Liquidity
 
 

Analysis of Short Term Financial Position or Test of Liquidity:

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Trade creditors; creditors for expenses; commercial banks; short-terms lenders are concerned with the short-term financial position or liquidity of the unit. Management is also interested in knowing how efficiently working capital is being utilized by the business. Shareholders and long-term creditors are also interested in studying the prospectus of dividend and interest payment.

Liquidity ratios measure the ability of the unit to meet its short-term (generally one year) obligations and reveals the short-term financial strength or weakness.

Such ratios provide answer to questions like:

(a) Is the unit capable to meet short-term obligation?

(b) Is working capital being properly utilized?

(c) is the current financial position improving?

Two types of ratios are calculated for testing short-term financial position of the business, these are liquidity ratios and current assets movement or efficiency ratios:

Liquidity ratios usually consist of:

(i) Current ratio

(ii) Acid test or quick or liquid ratio and

(iii) Absolute liquid ratio or cash position ratio.

Activity/efficiency ratios usually consist of:

(i) Inventory/Stock Turnover Ratio

(ii) Debtors / Receivable Turnover Ratio

(iii) Creditors / Payables Turnover Ratio

(iii) Working Capital Turnover Ratio

More study material from this to
 

More study material from this topic:

Meanings, Nature and Usefulness of Ratios Analysis
Interpretation of Ratios
Important Factors for Understanding Ratios Analysis
Significance and Usefulness Ratios Analysis
Classification of Ratios
Analysis of Short Term Financial Position or Test of Liquidity
Current Ratio
Quick/Acid Test/Liquid Ratio
Absolute Liquid Ratio
Inventory/Stock Turnover Ratio
Debtors / Receivable Turnover Ratio
Creditors / Payables Turnover Ratio
Working Capital Turnover Ratio
Profitability Ratios
Gross Profit Ratio (GP Ratio)
Operating Profit Ratio
Net profit ratio (NP ratio)
Earnings Per Share Ratio
Operating ratio
Expense ratio
Solvency ratios - Test of Long Term Solvency
Debt-equity Ratio
Debt Service Ratio or Interest Coverage Ratio
Fixed Assets Ratio
Debts to Total Funds or Solvency Ratio
Reserves to Capital Ratio
Capital Gearing Ratio
Proprietary Ratio
Accounting Ratios Formulas
Limitations of Ratios Analysis

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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