NCERT Solutions For Class 12 Accountancy Chapter 9
Accounting Ratios

Current ratio = 4:1

Liquid ratio = 1:1

Current liabilities = ₹75,000

Then liquid assets = ₹75,000

Current assets = ₹75,000 x 4 = ₹3,00,000

Inventory = Current assets – Liquid assets

= ₹3,00,000 – ₹75,000 = ₹2,25,000

Current ratio = 4.5:1

Quick ratio = 3:1

Let current liabilities = X

Then current assets = 4.5X

Current liabilities = 3X

Inventory = 4.5X – 3X = 1.5X

1.5X = ₹36,000

X = Current liabilities = ₹24,000

Current assets = ₹24,000 x 4.5 = ₹1,08,000

Ratio analysis refers to a technique of analysing the financial statements by computing various types of ratios. In other words, it is a process of determining and interpreting relationship between the items of financial statements to provide a meaningful result of the performance and financial position of a business.

Yes, it is true that the liquidity of a business firm is measured by its ability to pay its long term obligations as they become due. Here the long term obligation means payments of principal amount on the due date and payment of interest on the regular basis. For measuring the long term solvency of any business we calculate the following ratios:

1. Debt-equity ratio
2. Total assets to debt ratio
3. Proprietary ratio and
4. Interest coverage ratio

1. Inventory turnover ratio establishes relationship between Cost of Revenue from Operations and Average Inventory.
2. Trade receivables turnover ratio establishes relationship between Net Credit Revenue from Operations and Average Trade Receivables.
3. Trade payable turnover ratio indicates the relationship between credit purchases and average trade payables.
4. Working capital turnover ratio establishes relationship between Revenue from Operations and Working Capital.

Accounting ratios are classified as follows:

1. Profitability Ratios: They include Gross Profit Ratio, Net Profit Ratio, Operating Ratio, Operating Profit Ratio and Return on Investment Ratio.
2. Turnover or Performance or Activity Ratios: These ratios comprise Inventory Turnover Ratio, Trade Receivables Turnover Ratio, Trade Payables Turnover Ratio and Working Capital Turnover Ratio. 
3. Solvency Ratios: They include Debt Equity Ratio, Total Assets to Debt Ratio, Proprietary Ratio and Interest Coverage Ratio.
4. Liquidity Ratios: These ratios consist of Current Ratio and Liquid Ratio.

To meet its commitments, business needs liquid funds. The ability of the business to pay the amount due to stakeholders as and when it is due is known as liquidity, and the ratios calculated to measure it are known as ‘Liquidity Ratios’. These ratios are calculated to measure the short-term solvency of the business, i.e. the firm’s ability to meet its current obligations. Liquidity ratios include current ratio and liquid ratio.

Current Ratio: It indicates the amount of current assets available for repayment of current liabilities. Higher the ratio, the greater is the short term solvency of a firm and vice a versa. However, a very high ratio or very low ratio is a matter of concern. If the ratio is very high it means the current assets are lying idle. Very low ratio means the short term solvency of the firm is not good. Thus, the ideal current ratio of a company is 2:1 i.e. to repay current liabilities; there should be twice current assets.

Liquid ratio: This ratio establishes a relationship between liquid assets and current liabilities. Liquid ratio is a measure of the instant debt paying capacity of the business enterprise. It is a measure of the extent to which liquid resources are immediately available to meet current obligations. A quick ratio of 1:1 is considered good/favourable for a company. For the purpose of calculating this ratio, inventory and prepaid expenses are not taken into account as these may not be converted into cash in a very short period.