AccountsISC Class 12 · Ratio Analysis

Liquidity Ratios (Current and Quick Ratio): ISC Class 12 Accounts

Updated 17 October 2026 · Draft, not yet fact-checked

Current Ratio = Current Assets ÷ Current Liabilities. Quick Ratio (liquid or acid test ratio) = Quick Assets ÷ Current Liabilities, where Quick Assets = Current Assets − Inventories (excluding loose tools and spare parts) − Prepaid Expenses. Both measure the ability of a firm to pay its short-term obligations; a quick ratio of 1:1 and a current ratio of 2:1 are commonly used benchmarks.

Understand Liquidity Ratios: Current Ratio and Quick Ratio

What is measured. Liquidity ratios show whether a company can meet obligations falling due within twelve months. The ISC syllabus fixes the definitions, so use these exactly.

Current Assets (syllabus) = Current Investments + Inventories (excluding Loose Tools and Spare Parts) + Trade Receivables + Cash and Bank Balance + Short-term Loans and Advances + Other Current Assets.

Trade Receivables for the Current Ratio are net debtors: gross debtors (and bills receivable) less the provision for doubtful debts.
Other Current Assets are limited to prepaid expenses and accrued income.
Loose tools and spare parts are left out of inventories here (they are included in total assets for the solvency ratios).

Current Liabilities (syllabus) = Short-term Borrowings + Trade Payables + Other Current Liabilities + Short-term Provisions. Current maturities of long-term borrowings are in Short-term Borrowings, and a proposed dividend is not a current liability.

1. Current Ratio = Current Assets ÷ Current Liabilities, expressed as a ratio, for example 2 : 1. The benchmark of 2 : 1 is a rule of thumb, not a requirement of the syllabus.

2. Quick Ratio / Liquid Ratio / Acid Test Ratio = Quick Assets ÷ Current Liabilities, with three equivalent forms in the syllabus: Quick Assets, or (All Current Assets − Inventories (excluding Loose Tools and Spare Parts) − Prepaid Expenses), or Liquid Assets. A ratio of 1 : 1 is the usual benchmark.

Effect of transactions. The syllabus restricts such problems to the Current Ratio, Quick Ratio and Debt-Equity Ratio. For each transaction decide which current assets and liabilities change, then recompute. Points to remember:

A transaction between two current assets leaves total current assets unchanged but may change quick assets.
Paying a creditor from cash reduces both sides equally; the Current Ratio rises if it is above 1 : 1 and falls if it is below.
A long-term source (such as issuing shares) that brings cash raises current assets with no change in current liabilities.
Buying stock on credit adds the same amount to current assets and current liabilities, and leaves quick assets unchanged.

Limits. A high ratio is not always good: it may mean idle cash or slow-moving stock. Compare with the quick ratio, which strips out the least liquid items. Also, the ratio can be window-dressed at the year-end.

Liquidity Ratios: Current Ratio and Quick Ratio: key facts

Current Ratio: Current Assets ÷ Current Liabilities | usually expressed as x : 1; Benchmark 2 : 1 is conventional.
Quick Ratio: Quick Assets ÷ Current Liabilities | Quick Assets = Current Assets − Inventories − Prepaid Expenses; Loose tools and spare parts are excluded from inventories throughout.
Current Assets (ISC): Current Investments
Inventories
Trade Receivables
Cash and Bank
Short-term Loans and Advances
Other Current Assets; Receivables net of provision.
Current Liabilities (ISC): Short-term Borrowings
Trade Payables
Other Current Liabilities
Short-term Provisions; Includes current maturities of long-term debt.
Working capital: Current Assets | less Current Liabilities; Used again in the activity ratios.

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

Get the two totals right and the ratios follow.

1List current assets with receivables net of provision, and leave out loose tools and spare parts.
2List current liabilities including short-term borrowings and provisions.
3Divide for the current ratio; subtract inventories and prepaid expenses for quick assets.
4For effect-of-transaction questions, adjust the affected items and recompute both ratios.
5Round to two decimals and write as x : 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.

Ability to pay the next twelve months' bills

Suppose a bakery company has cash and receivables of ₹2,40,000, stock of ₹1,20,000 and prepaid rent of ₹20,000. It owes suppliers and others ₹1,60,000 within a year.

What are its current ratio and quick ratio?

Try it first, then show the solutionSolution

Current assets = 2,40,000 + 1,20,000 + 20,000 = ₹3,80,000.
Current ratio = 3,80,000 ÷ 1,60,000 = 2.375, about 2.38 : 1.
Quick assets = 3,80,000 − 1,20,000 − 20,000 = 2,40,000; quick ratio = 2,40,000 ÷ 1,60,000 = 1.5 : 1.

Answer: Current ratio 2.38 : 1; quick ratio 1.5 : 1.

Memory hook: Quick means ready cash, not stock or prepaid.

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 = Current − I − P
Subtract Inventories and Prepaid expenses from current assets.
Use it when: Quick assets.
Net debtors, not gross
In the current ratio use debtors after the provision.
Use it when: Syllabus rule.
Above one, pay and rise
Paying creditors raises a ratio that is above 1 : 1.
Use it when: Effect of transactions.

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 from current ratio data · 1 mark · MCQBoard level

Current liabilities are ₹2,00,000 and the current ratio is 2 : 1. Inventories are ₹1,00,000 and prepaid expenses ₹20,000. The quick ratio is:
(a) 1.4 : 1
(b) 1.9 : 1
(c) 1 : 1
(d) 2 : 1

Try it first, then show the solutionSolution

Current assets = 2 × 2,00,000 = ₹4,00,000.
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: (a) 1.4 : 1

Example 2: Both ratios from a Balance Sheet extract · 6 marks · Long answerHarder board level

Calculate the current ratio and quick ratio of Delta Ltd. from: Current investments ₹50,000; raw materials ₹1,00,000; finished goods ₹1,50,000; loose tools ₹10,000; stores and spare parts ₹20,000; debtors ₹2,40,000; provision for doubtful debts ₹20,000; bills receivable ₹30,000; cash in hand ₹15,000; bank ₹85,000; short-term loans and advances ₹40,000; prepaid expenses ₹12,000; accrued income ₹8,000. Current liabilities: short-term borrowings ₹1,20,000; trade payables ₹1,40,000; outstanding expenses ₹30,000; provision for tax ₹50,000. (6 marks)

Try it first, then show the solutionSolution

Inventories (excluding loose tools and spare parts) = 1,00,000 + 1,50,000 = ₹2,50,000.
Trade receivables = 2,40,000 − 20,000 + 30,000 = ₹2,50,000; cash and bank = ₹1,00,000; other current assets = 12,000 + 8,000 = ₹20,000.
Current assets = 50,000 + 2,50,000 + 2,50,000 + 1,00,000 + 40,000 + 20,000 = ₹7,10,000.
Current liabilities = 1,20,000 + 1,40,000 + 30,000 + 50,000 = ₹3,40,000.
Current ratio = 7,10,000 ÷ 3,40,000 = 2.09 : 1. Quick assets = 7,10,000 − 2,50,000 − 12,000 = ₹4,48,000; quick ratio = 4,48,000 ÷ 3,40,000 = 1.32 : 1.

Answer: Current ratio = 2.09 : 1; Quick ratio = 1.32 : 1.

Example 3: Working back from ratios · 3 marks · Short answerHarder board level

The current ratio of a firm is 3 : 1 and its working capital is ₹3,00,000. The quick ratio is 1.8 : 1 and prepaid expenses are ₹30,000. Find current assets, current liabilities, quick assets and inventories. (3 marks)

Try it first, then show the solutionSolution

CA − CL = 3,00,000 and CA = 3 CL, so 2 CL = 3,00,000: CL = ₹1,50,000 and CA = ₹4,50,000.
Quick assets = 1.8 × 1,50,000 = ₹2,70,000.
Inventories = 4,50,000 − 2,70,000 − 30,000 = ₹1,50,000.

Answer: CA ₹4,50,000; CL ₹1,50,000; Quick assets ₹2,70,000; Inventories ₹1,50,000.

Example 4: Effect of transactions on the ratios · 6 marks · Long answerHarder board level

A firm has current assets of ₹6,00,000 (including inventories ₹2,00,000 and prepaid expenses ₹20,000) and current liabilities of ₹3,00,000. Calculate the current ratio and quick ratio. Then, treating each transaction separately, find the ratios after: (i) goods purchased on credit for ₹40,000; (ii) a creditor of ₹50,000 paid by cheque; (iii) goods costing ₹30,000 sold for ₹45,000 cash; (iv) debentures issued for ₹1,00,000 cash; (v) ₹10,000 paid in cash for next year's insurance. (6 marks)

Try it first, then show the solutionSolution

Initially CR = 6,00,000 ÷ 3,00,000 = 2.00 : 1; quick assets = 6,00,000 − 2,00,000 − 20,000 = 3,80,000, QR = 1.27 : 1.
(i) CA 6,40,000, CL 3,40,000, QA 3,80,000 unchanged.
(ii) CA 5,50,000, CL 2,50,000, QA 3,30,000.
(iii) CA 6,15,000, CL 3,00,000, QA 4,25,000.
(iv) CA 7,00,000, CL 3,00,000, QA 4,80,000.
(v) CA 6,00,000 unchanged, but prepaid rises to 30,000, so QA = 3,70,000.

Answer:

Situation	Current ratio	Quick ratio
Initial	2.00 : 1	1.27 : 1
(i) Goods bought on credit	1.88 : 1	1.12 : 1
(ii) Creditor paid	2.20 : 1	1.32 : 1
(iii) Goods sold for cash	2.05 : 1	1.42 : 1
(iv) Debentures issued	2.33 : 1	1.60 : 1
(v) Insurance prepaid	2.00 : 1	1.23 : 1

Example 5: Does paying creditors always help? · 3 marks · Short answerHOTS / competency

Firm S has current assets of ₹3,00,000 and current liabilities of ₹4,00,000. Firm T has current assets of ₹6,00,000 and current liabilities of ₹3,00,000. Each pays creditors ₹1,00,000 in cash. Find each firm's current ratio before and after, and explain the difference in effect. (3 marks)

Try it first, then show the solutionSolution

S: before 3,00,000 ÷ 4,00,000 = 0.75 : 1; after 2,00,000 ÷ 3,00,000 = 0.67 : 1.
T: before 6,00,000 ÷ 3,00,000 = 2 : 1; after 5,00,000 ÷ 2,00,000 = 2.5 : 1.
Subtracting the same amount from a smaller numerator hurts a ratio below 1 : 1 and helps one above 1 : 1.

Answer: S: 0.75 : 1 falls to 0.67 : 1. T: 2 : 1 rises to 2.5 : 1. Payment improves the ratio only when it is above 1 : 1.

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

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

Mistake: Counting loose tools and spare parts in current assets
Treating them as stock.
Wrong working
Inventories = 2,80,000
Right working
Inventories = 2,50,000
Do this: The ISC syllabus excludes loose tools and spare parts from current assets.
Usually costs: 1-2 marks.
Mistake: Using gross debtors in the current ratio
Ignoring the provision.
Wrong working
Trade receivables = 2,70,000
Right working
2,40,000 − 20,000 + 30,000 = 2,50,000
Do this: Net debtors, as the syllabus says.
Usually costs: 1 mark.
Mistake: Subtracting only inventories for quick assets
Forgetting prepaid expenses.
Wrong working
Quick assets = 7,10,000 − 2,50,000 = 4,60,000
Right working
7,10,000 − 2,50,000 − 12,000 = 4,48,000
Do this: Subtract both inventories and prepaid expenses.
Usually costs: 1-2 marks.
Mistake: Treating proposed dividend as a current liability
Old format.
Wrong working
CL = 3,40,000 + 80,000
Right working
CL = 3,40,000; dividend is a contingent liability
Do this: It is not a liability until approved.
Usually costs: 1-2 marks.

Exam tips

Show current assets and current liabilities as separate working notes.
Express the answer as x : 1 and give two decimals.
For "effect of transactions", recompute from totals, not from the ratio.
If the question gives "liquid assets", use the third form and explain it.

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
The acid test ratio is calculated after excluding from current assets:
(a) debtors
(b) cash
(c) inventories and prepaid expenses
(d) current investments
Hint
Least liquid items.
Answer
(c) inventories and prepaid expenses
Q2 · 3 marks · Short answerBoard level
Inventories ₹80,000 (including loose tools ₹5,000); trade receivables (net) ₹1,20,000; cash and bank ₹40,000; current investments ₹20,000; prepaid expenses ₹10,000. Trade payables ₹1,00,000; outstanding expenses ₹20,000; short-term borrowings ₹30,000; provision for tax ₹25,000. Calculate the current ratio and quick ratio. (3 marks)
Hint
Inventories exclude loose tools.
Answer
CA = 75,000 + 1,20,000 + 40,000 + 20,000 + 10,000 = 2,65,000; CL = 1,75,000; Current ratio = 1.51 : 1. Quick assets = 2,65,000 − 75,000 − 10,000 = 1,80,000; Quick ratio = 1.03 : 1.
Q3 · 3 marks · Short answerHarder board level
A firm's current ratio is 4 : 1 and its quick ratio is 2.5 : 1. Inventories are ₹3,00,000 and there are no prepaid expenses. Find current liabilities and current assets. (3 marks)
Hint
CA − 3,00,000 = 2.5 CL.
Answer
4 CL − 3,00,000 = 2.5 CL, so CL = ₹2,00,000 and CA = ₹8,00,000.
Q4 · 6 marks · Long answerHarder board level
A company has current assets of ₹5,00,000 (inventories ₹1,50,000; prepaid expenses ₹10,000) and current liabilities of ₹2,50,000. Calculate the current ratio and quick ratio, then find both after each of these independent transactions: (i) bills payable ₹30,000 honoured by cheque; (ii) machinery of book value ₹40,000 sold for ₹60,000 cash; (iii) goods costing ₹20,000 sold on credit for ₹28,000; (iv) a bank overdraft of ₹50,000 taken to buy stock. (6 marks)
Hint
Quick assets start at 3,40,000.
Answer
Initial: 2.00 : 1 and 1.36 : 1. (i) 2.14 : 1 and 1.41 : 1. (ii) 2.24 : 1 and 1.60 : 1. (iii) 2.03 : 1 and 1.47 : 1. (iv) 1.83 : 1 and 1.13 : 1.
Q5 · 3 marks · Short answerHOTS / competency
Firm A has current assets ₹6,00,000, of which ₹4,50,000 is slow-moving stock; Firm B has current assets ₹4,50,000, of which stock is ₹1,00,000. Both have current liabilities of ₹3,00,000 and no prepaid expenses. Compare the two firms using both ratios and decide which is more liquid. (3 marks)
Hint
Compute quick assets.
Answer
A: current ratio 2.00 : 1, quick ratio 1,50,000 ÷ 3,00,000 = 0.50 : 1. B: current ratio 1.50 : 1, quick ratio 3,50,000 ÷ 3,00,000 = 1.17 : 1. B is more liquid because its quick ratio is higher; A's higher current ratio is due to stock.

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.Current ratio formula?Show answer
Current Assets ÷ Current Liabilities.
2.Quick assets?Show answer
Current assets − inventories − prepaid expenses.
3.What does Other Current Assets contain in ISC?Show answer
Prepaid expenses and accrued income.
4.Which items are left out of inventories in these ratios?Show answer
Loose tools and spare parts.
5.Which ratios are tested for effect of transactions?Show answer
Current ratio, quick ratio and debt-equity ratio.

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

Are ideal ratios given in the syllabus?

No. 2 : 1 and 1 : 1 are conventional benchmarks used in questions; always interpret from the figures.

Do I include proposed dividend in current liabilities?

No. It is a contingent liability until approved.

Is bank overdraft a current liability?

Yes, under Short-term Borrowings.

Are the ratios written as fractions?

Write them as x : 1, to two decimals.