AccountancyCBSE Class 12 · Accounting Ratios

Liquidity Ratios Class 12: Current Ratio, Quick Ratio and Effect of Transactions

Updated 15 October 2026 · Fact-checked

Liquidity ratios measure a firm's ability to meet its short-term obligations. Current ratio = current assets ÷ current liabilities; quick (liquid) ratio = quick assets ÷ current liabilities, where quick assets are current assets minus inventories and prepaid expenses. A current ratio of about 2 : 1 and a quick ratio of about 1 : 1 are usually considered safe.

Safe levels: current assets are twice current liabilities (2 : 1), and quick assets, which exclude inventory and prepaid, equal them (1 : 1).

Illustration drawn for QuestionBuddy.

Understand Liquidity Ratios: Current Ratio and Quick Ratio

Why liquidity? Short-term creditors, banks and suppliers want to know whether the firm can pay its current liabilities on time out of its current assets.

1. Current ratio = Current assets ÷ Current liabilities.

Current assets: current investments, inventories (but not loose tools and stores and spares: Schedule III shows them under inventories, yet CBSE leaves them out of current assets when calculating the current ratio), trade receivables (net of provision), cash and cash equivalents, short-term loans and advances, other current assets.
Current liabilities: short-term borrowings (including bank overdraft and cash credit), trade payables, other current liabilities (including current maturities of long-term debt), short-term provisions.
About 2 : 1 is considered safe: even if current assets lose half their value, current liabilities can still be met. Too high a ratio may mean idle funds.

2. Quick (liquid, acid-test) ratio = Quick assets ÷ Current liabilities.

Quick assets = Current assets − Inventories − Prepaid expenses.
Inventories take time to sell; prepaid expenses cannot be turned into cash at all. About 1 : 1 is considered safe.

Working capital = Current assets − Current liabilities.

Working back missing figures. Two ratios give two equations. Example: current ratio 2.5, working capital 1,80,000 → CA − CL = 1,80,000 and CA = 2.5 CL, so 1.5 CL = 1,80,000.

Effect of a transaction on the current ratio (the favourite MCQ):

If both CA and CL fall by the same amount (paying creditors) and the ratio is above 1, the ratio rises.
If both rise by the same amount (buying inventory on credit) and the ratio is above 1, it falls.
Movement within current assets (collecting debtors) leaves the current ratio unchanged, but may change the quick ratio (buying inventory for cash lowers it).
Using current assets for a non-current purpose (buying machinery for cash) lowers it; raising long-term funds into cash raises it.

Liquidity Ratios: Current Ratio and Quick Ratio: key facts

Current ratio: Current assets ÷ Current liabilities; Expressed as x : 1.
Quick ratio: Quick assets ÷ Current liabilities
Quick assets: Current assets − Inventories − Prepaid expenses; Advance tax, if given, is also excluded (NCERT).
Working capital: Current assets − Current liabilities
Back-working CL: CL = Working capital ÷ (Current ratio − 1)
Back-working inventory: Inventory (+ prepaid) = (Current ratio − Quick ratio) × CL

How to answer Liquidity Ratios: Current Ratio and Quick Ratio questions

Liquidity questions are either straight computations or 'find the missing figure' puzzles. Both start with listing current assets and current liabilities correctly.

1List current assets and current liabilities under Schedule III; include current maturities of long-term debt and bank overdraft in CL.
2Current ratio = CA ÷ CL; express as x : 1, rounded to two decimals.
3Quick assets = CA − inventories − prepaid expenses; quick ratio = QA ÷ CL.
4For missing figures, write two equations from the ratios given and solve.
5For transaction effects, apply the change to CA and CL and recompute.
6Interpret briefly: compare with 2 : 1 and 1 : 1.

Liquidity Ratios: Current Ratio and Quick Ratio in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Good current ratio, weak quick ratio

Suppose a garment wholesaler has current assets of ₹5,00,000, of which ₹3,50,000 is unsold stock, and current liabilities of ₹2,00,000. Its owner proudly tells a supplier, 'My current ratio is 2.5, better than the textbook 2 : 1.'

Calculate the quick ratio and say whether the supplier should be fully reassured.

Try it first, then show the solutionSolution

Current ratio = 5,00,000 ÷ 2,00,000 = 2.5 : 1.
Quick assets = 5,00,000 − 3,50,000 = ₹1,50,000.
Quick ratio = 1,50,000 ÷ 2,00,000 = 0.75 : 1.

Answer: Quick ratio is only 0.75 : 1. Most current assets are stock that must be sold before cash comes in, so the firm may struggle to pay creditors on time; the supplier should not rely on the current ratio alone.

Memory hook: Stock is not cash until it sells.

Tricks to remember Liquidity Ratios: Current Ratio and Quick Ratio

Short memory aids. Say each one aloud once, then use it on a question the same day.

Quick = minus I and P
Quick assets = current assets minus Inventory and Prepaids.
Use it when: Quick ratio.
Above 1: shrink both, ratio grows
When the ratio is above 1, equal decreases in CA and CL raise it; equal increases lower it.
Use it when: Transaction-effect MCQs.
2 and 1
Current ratio about 2 : 1; quick ratio about 1 : 1.
Use it when: Interpretation.

Liquidity Ratios: Current Ratio and Quick Ratio: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Quick ratio · 1 mark · MCQBoard level

Current assets ₹4,00,000 (including inventories ₹1,00,000 and prepaid expenses ₹20,000); current liabilities ₹2,00,000. The quick ratio is:
(a) 2 : 1
(b) 1.5 : 1
(c) 1.4 : 1
(d) 1.9 : 1

Try it first, then show the solutionSolution

Quick assets = 4,00,000 − 1,00,000 − 20,000 = 2,80,000.
Quick ratio = 2,80,000 ÷ 2,00,000 = 1.4 : 1.

Answer: (c) 1.4 : 1

Example 2: Both ratios from items · 3 marks · Short answerBoard level

From the following, calculate the current ratio and quick ratio: inventories ₹1,50,000; trade receivables ₹1,20,000; cash and cash equivalents ₹60,000; prepaid expenses ₹10,000; current investments ₹40,000; trade payables ₹1,00,000; outstanding expenses ₹20,000; bank overdraft ₹40,000. (3 marks)

Try it first, then show the solutionSolution

CA = 1,50,000 + 1,20,000 + 60,000 + 10,000 + 40,000 = 3,80,000; CL = 1,00,000 + 20,000 + 40,000 = 1,60,000.
Current ratio = 3,80,000 ÷ 1,60,000 = 2.375 : 1.
Quick assets = 3,80,000 − 1,50,000 − 10,000 = 2,20,000; quick ratio = 1.375 : 1.

Answer: Current ratio 2.38 : 1; quick ratio 1.38 : 1.

Example 3: Find the inventory · 4 marks · Short answerHarder board level

A company's current ratio is 2.5 : 1, its quick ratio is 1.5 : 1, and its working capital is ₹1,80,000. There are no prepaid expenses. Calculate current assets, current liabilities and inventories. (4 marks)

Try it first, then show the solutionSolution

CA − CL = 1,80,000 and CA = 2.5 CL, so 1.5 CL = 1,80,000: CL = ₹1,20,000.
CA = 2.5 × 1,20,000 = ₹3,00,000.
Quick assets = 1.5 × 1,20,000 = ₹1,80,000; inventories = 3,00,000 − 1,80,000 = ₹1,20,000.

Answer: CA ₹3,00,000; CL ₹1,20,000; inventories ₹1,20,000.

Example 4: Effect of transactions · 4 marks · Short answerHarder board level

A company's current assets are ₹2,00,000 and current liabilities ₹1,00,000. State, with calculation, the effect on the current ratio of each separately: (i) paid creditors ₹20,000; (ii) bought inventory on credit ₹20,000; (iii) sold goods costing ₹10,000 for ₹15,000 cash; (iv) bought machinery for cash ₹10,000. (4 marks)

Try it first, then show the solutionSolution

(i) 1,80,000 ÷ 80,000 = 2.25: increase.
(ii) 2,20,000 ÷ 1,20,000 = 1.83: decrease.
(iii) Inventory −10,000, cash +15,000: 2,05,000 ÷ 1,00,000 = 2.05: increase.
(iv) 1,90,000 ÷ 1,00,000 = 1.9: decrease.

Answer: (i) Increase to 2.25; (ii) decrease to 1.83; (iii) increase to 2.05; (iv) decrease to 1.9.

Example 5: Two ratios, then a payment · 4 marks · Short answerHOTS / competency

A company's current ratio is 3 : 1 and quick ratio 1.8 : 1. Its inventories are ₹1,20,000 (no prepaid expenses). (i) Calculate current assets, current liabilities and working capital. (ii) Find both ratios after it pays creditors ₹50,000. (4 marks)

Try it first, then show the solutionSolution

Inventory = (3 − 1.8) × CL = 1.2 CL = 1,20,000, so CL = ₹1,00,000.
CA = ₹3,00,000; working capital = ₹2,00,000.
After paying ₹50,000: CR = 2,50,000 ÷ 50,000 = 5 : 1; QR = 1,30,000 ÷ 50,000 = 2.6 : 1.

Answer: (i) CA ₹3,00,000; CL ₹1,00,000; WC ₹2,00,000. (ii) CR 5 : 1; QR 2.6 : 1.

Example 6: Paying creditors does not always raise the ratio · 1 mark · Assertion-reasonHOTS / competency

Assertion (A): Payment to creditors always increases the current ratio.
Reason (R): When the current ratio is more than 1, an equal decrease in current assets and current liabilities increases the ratio.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Try it first, then show the solutionSolution

If the ratio is below 1, paying creditors lowers it; if equal to 1, no change. So 'always' is false; R is true.

Answer: (d) A is false, but R is true.

Where students lose marks in Liquidity Ratios: Current Ratio and Quick Ratio

The slips examiners see most often, and what to write instead.

Mistake: Leaving bank overdraft out of current liabilities
Thinking it is a long-term loan.
Wrong working
CL = 1,20,000.
Right working
CL = 1,60,000 including bank overdraft 40,000.
Do this: Bank overdraft and cash credit are short-term borrowings.
Usually costs: 1 mark.
Mistake: Not removing prepaid expenses from quick assets
Removing only inventory.
Wrong working
QA = 3,80,000 − 1,50,000 = 2,30,000.
Right working
QA = 3,80,000 − 1,50,000 − 10,000 = 2,20,000.
Do this: Inventories and prepaid expenses both go.
Usually costs: 1 mark.
Mistake: Counting loose tools in current assets for the current ratio
Schedule III lists loose tools and stores and spares under inventories.
Wrong working
CA = 2,50,000 including loose tools 30,000.
Right working
CA for the ratio = 2,20,000: loose tools and stores and spares are left out.
Do this: Balance sheet: inventories. Current ratio: exclude them (CBSE Sample Paper 2023-24).
Usually costs: 1 mark.
Mistake: Writing the ratio without ': 1'
Leaving a bare number.
Wrong working
Current ratio = 2.375.
Right working
Current ratio = 2.38 : 1.
Do this: Liquidity ratios are written as x : 1.
Usually costs: 1/2 mark.

Exam tips

Show the CA and CL lists with totals; the ratio itself carries only part of the mark.
In effect-of-transaction questions, start from given figures and recompute; do not rely only on rules.
Round to two decimals.
Liquidity ratios appear as 1-mark MCQs and inside 4-mark ratio questions in Part B Option I.

Practice questions on Liquidity Ratios: Current Ratio and Quick Ratio

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
Quick assets are calculated as:
(a) current assets − inventories
(b) current assets − inventories − prepaid expenses
(c) current assets − current liabilities
(d) cash + current investments only
Hint
Two items removed.
Answer
(b) current assets − inventories − prepaid expenses
Q2 · 1 mark · MCQBoard level
A company's working capital is ₹3,00,000; its trade payables are ₹80,000 and other current liabilities ₹70,000. Its current assets are:
(a) ₹1,50,000
(b) ₹3,00,000
(c) ₹4,50,000
(d) ₹2,20,000
Hint
CA = WC + CL.
Answer
(c) ₹4,50,000
Q3 · 3 marks · Short answerBoard level
Calculate the current ratio and quick ratio: current assets ₹3,60,000, including inventories ₹1,20,000 and prepaid expenses ₹12,000; current liabilities ₹1,50,000. (3 marks)
Hint
QA = 2,28,000.
Answer
Current ratio = 3,60,000 ÷ 1,50,000 = 2.4 : 1. Quick assets = 3,60,000 − 1,20,000 − 12,000 = 2,28,000; quick ratio = 1.52 : 1.
Q4 · 3 marks · Short answerHarder board level
Current ratio 2.8 : 1, quick ratio 1.6 : 1, current assets ₹5,60,000, no prepaid expenses. Find current liabilities and inventories. (3 marks)
Hint
CL = CA ÷ 2.8.
Answer
CL = 5,60,000 ÷ 2.8 = ₹2,00,000; quick assets = 1.6 × 2,00,000 = 3,20,000; inventories = 5,60,000 − 3,20,000 = ₹2,40,000.
Q5 · 3 marks · Short answerHarder board level
A company's quick assets are ₹1,50,000 and current liabilities ₹1,00,000. State the effect on the quick ratio, with figures, of each separately: (i) bought inventory for cash ₹20,000; (ii) sold inventory costing ₹10,000 for ₹12,000 on credit; (iii) paid creditors ₹30,000. (3 marks)
Hint
Inventory is not a quick asset.
Answer
(i) QA 1,30,000: 1.3 : 1, decrease. (ii) QA 1,62,000 (receivable added): 1.62 : 1, increase. (iii) 1,20,000 ÷ 70,000 = 1.71 : 1, increase.
Q6 · 3 marks · Short answerHarder board level
Why is a current ratio of 2 : 1 generally considered satisfactory, and why can a very high current ratio be undesirable? (3 marks)
Hint
Safety margin vs idle funds.
Answer
At 2 : 1, even if current assets realise only half their book value, current liabilities can still be paid, giving a safety margin. A very high ratio may mean idle cash, excess inventory or slow-paying debtors, so funds are not earning a return.
Q7 · 3 marks · Short answerHarder board level
Inventories ₹90,000; loose tools ₹30,000; trade receivables ₹80,000; cash ₹50,000; trade payables ₹60,000; current maturities of long-term debt ₹40,000; provision for tax ₹20,000. Calculate the current ratio and quick ratio. (3 marks)
Hint
Loose tools are left out of current assets for the current ratio; current maturities are current liabilities.
Answer
Loose tools are excluded. CA = 90,000 + 80,000 + 50,000 = 2,20,000; CL = 60,000 + 40,000 + 20,000 = 1,20,000. Current ratio = 1.83 : 1. Quick assets = 2,20,000 − 90,000 = 1,30,000; quick ratio = 1.08 : 1.
Q8 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Bank overdraft is included in current liabilities when calculating the quick ratio.
Reason (R): Bank overdraft is a short-term borrowing repayable on demand.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Schedule III classification.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q9 · 4 marks · Short answerHOTS / competency
Current ratio 2.5 : 1, quick ratio 1.5 : 1, current liabilities ₹80,000 (no prepaid expenses). Find inventories, then both ratios after buying inventory of ₹20,000 on credit. (4 marks)
Hint
Inventory = (2.5 − 1.5) × 80,000.
Answer
CA = 2,00,000; QA = 1,20,000; inventories = ₹80,000. After: CR = 2,20,000 ÷ 1,00,000 = 2.2 : 1; QR = 1,20,000 ÷ 1,00,000 = 1.2 : 1.
Q10 · 3 marks · Short answerHOTS / competency
A firm's current ratio is 3.5 : 1 but its quick ratio is 0.6 : 1. What does this suggest about its current assets, and what risk does it face? (3 marks)
Hint
Gap between the two ratios.
Answer
Most current assets are inventories (and prepaid expenses): the gap (2.9) equals inventory relative to current liabilities. The firm may be overstocked or holding slow-moving stock, so it could struggle to pay creditors on time despite a high current ratio.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Formula for current ratio?Show answer
Current assets ÷ current liabilities.
2.Which two items are excluded from quick assets?Show answer
Inventories and prepaid expenses.
3.Current ratio 2 : 1, working capital ₹50,000: current liabilities?Show answer
₹50,000.
4.Effect on current ratio (above 1) of collecting cash from debtors?Show answer
No change.
5.Ideal quick ratio?Show answer
About 1 : 1.

Liquidity Ratios: Current Ratio and Quick Ratio: frequently asked questions

What are liquidity ratios in Class 12?

Ratios that measure the ability to pay short-term obligations: the current ratio and the quick (liquid) ratio.

Why are prepaid expenses excluded from quick assets?

They cannot be converted into cash; they only save a future payment.

Is bank overdraft a current liability?

Yes; under Schedule III it is a short-term borrowing and is included in current liabilities.

Does a higher current ratio always mean better liquidity?

No. It may hide slow-moving inventory or idle funds; check the quick ratio too.