Question

What ratios are to be studied for assessing the liquidity and profitability position of a firm? Explain with suitable examples.

23 Jan 2022
Answer :
Word Count : 848

To assess the liquidity and profitability position of a firm in Accountancy-II, several financial ratios are used. These ratios help in evaluating a firm’s ability to meet its short-term obligations and measure its ability to generate profits over time. Below is a detailed explanation of these ratios along with examples:  

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### Liquidity Ratios  
Liquidity ratios are used to determine a firm’s ability to cover its short-term liabilities using its current assets. Key ratios include:  

#### 1. Current Ratio  
Formula:  
\[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \]  

Explanation:  
- A current ratio indicates the firm’s capacity to pay its short-term liabilities with its current assets.  
- A ratio of 2:1 is generally considered ideal.  

Example:  
If a firm has current assets of ₹1,00,000 and current liabilities of ₹50,000:  
\[ \text{Current Ratio} = \frac{1,00,000}{50,000} = 2:1 \]  
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What ratios are to be studied for assessing the liquidity and profitability position of a firm? Explain with suitable examples.

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