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Question
The immediate solvency ratio is .
The immediate solvency ratio is .
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Solution
The correct option is B quick ratio
Quick Ratio = [Current Assets- Inventory] / [Current liabilities - Bank Overdraft and Cash credit]While calculating quick ratio we reduce the amount of inventory as it is less liquid than the other current assets. The reason to reduce the amount of bank overdraft and cash credit is that mostly these are secured against inventory. So quick ratio gives us an immediate solvency ratio and is a much more conservative ratio than current ratio.
Quick Ratio = [Current Assets- Inventory] / [Current liabilities - Bank Overdraft and Cash credit]
While calculating quick ratio we reduce the amount of inventory as it is less liquid than the other current assets. The reason to reduce the amount of bank overdraft and cash credit is that mostly these are secured against inventory. So quick ratio gives us an immediate solvency ratio and is a much more conservative ratio than current ratio.
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