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Liquidity Ratios Video Lecture | Accountancy Class 12 - Commerce

49 videos|111 docs|56 tests

FAQs on Liquidity Ratios Video Lecture - Accountancy Class 12 - Commerce

1. What are liquidity ratios in commerce?
Ans. Liquidity ratios in commerce are financial metrics used to assess a company's ability to meet its short-term obligations using its current assets. These ratios measure the company's liquidity and provide insights into its financial health and ability to handle unexpected expenses or financial difficulties.
2. How are liquidity ratios calculated?
Ans. Liquidity ratios are calculated by dividing various components of current assets and liabilities to assess a company's liquidity. Some common liquidity ratios include the current ratio, quick ratio, and cash ratio. The formulas for these ratios are as follows: - Current Ratio = Current Assets / Current Liabilities - Quick Ratio = (Current Assets - Inventory) / Current Liabilities - Cash Ratio = Cash and Cash Equivalents / Current Liabilities
3. What is the significance of liquidity ratios in commerce?
Ans. Liquidity ratios play a crucial role in commerce as they help evaluate a company's ability to pay off its short-term debts and obligations. These ratios provide insights into a company's financial stability, solvency, and its ability to generate sufficient cash flow. It helps investors, creditors, and stakeholders assess the company's financial health and make informed decisions.
4. How do liquidity ratios impact a company's financial health?
Ans. Liquidity ratios have a significant impact on a company's financial health. A high liquidity ratio indicates that a company has enough current assets to cover its short-term liabilities, which signifies good financial health. On the other hand, a low liquidity ratio suggests that a company may face difficulties in meeting its short-term obligations, indicating potential financial distress.
5. What are the limitations of liquidity ratios in commerce?
Ans. While liquidity ratios provide valuable insights into a company's financial health, they have certain limitations. These ratios do not consider the quality of assets, such as how quickly inventory can be sold or how collectible accounts receivable are. Additionally, liquidity ratios only focus on short-term financial obligations and do not provide a comprehensive analysis of a company's overall financial performance. Therefore, it is important to consider other financial metrics and factors when assessing a company's financial health.
49 videos|111 docs|56 tests

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