Trade creditors; creditors for expenses; commercial banks; shortterms lenders
are concerned with the shortterm financial position or liquidity of the unit.
Management is also interested in knowing how efficiently working capital is
being utilized by the business. Shareholders and longterm creditors are also
interested in studying the prospectus of dividend and interest payment. Liquidity ratios measure the ability of the unit to meet its shortterm
(generally one year) obligations and reveals the shortterm financial strength
or weakness.
Such ratios provide answer to questions like:
(a) Is the unit capable to meet shortterm obligation?
(b) Is working capital being properly utilized?
(c) is the current financial position improving?
Two types of ratios are calculated for testing shortterm financial position
of the business,
these are
liquidity ratios and current assets movement or efficiency ratios:
Liquidity ratios usually consist of:
(i) Current ratio
(ii) Acid test or quick or liquid ratio and
(iii) Absolute liquid ratio or cash position ratio.
Activity/efficiency ratios usually consist of:
(i) Inventory/Stock Turnover Ratio
(ii) Debtors /
Receivable Turnover Ratio
(iii) Creditors /
Payables Turnover Ratio
(iii) Working Capital Turnover Ratio
