Current ratio is also known as working capital ratio. It expresses the relationship between current assets and current liabilities. This ratio is calculated by dividing current assets by current liabilities. It is expressed as pure ratio, standard current ratio is 2:1. Means current assets should be double the current liabilities. This ratio tests the credit strength and solvency of an organization. It shows the strength of working capital, it indicates ability to discharge short term liabilities.
Current Ratio=Current Assets/Current Liabilities
Current assets includes
I) Inventories of raw materials, finished goods, work-in-progress, stores & spare, loose tools,
II) Sundry debtors,
III) Short-term loan, deposits, advance,
IV) Cash on hand and bank,
V) Prepaid expenses, accrued income,
VI) Bills receivables,
VII) Marketable investments, short term securities.
Current liabilities includes sundry creditors, bills payables, outstanding expenses, unclaimed dividends, interest accrued but not due on secured and unsecured loans, advances received, income received in advance, provision for tax, purposed dividend loan instalment of secured and unsecured loan payable within 12 months.
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