Calculate 'Liquid Ratio' from the following information:
|
Current liabilities |
Rs. 50,000 |
|
Current assets |
Rs. 80,000 |
|
Inventories |
Rs. 20,000 |
|
Advance tax |
Rs. 5,000 |
|
Prepaid expenses |
Rs. 5,000 |
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → 1:1
Liquid ratio = liquid assets / current liabilities. Liquid assets are the current assets that can quickly be turned into cash, so inventories, prepaid expenses and advance tax are taken out.
Liquid assets = 80,000 − (20,000 + 5,000 + 5,000) = Rs. 50,000
Liquid ratio = 50,000 / 50,000 = 1:1
Leaving advance tax or prepaid expenses inside the liquid assets gives 1.1:1 and is the common slip.
NCERT (2026-27 edition):
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