Calculate 'Liquid Ratio' from the following information: | Current liabilities | Rs. 50,000 | |---|---| | Current assets | Rs. 80,000 | | Inventories…

Liquid Ratio measures the ability of a business to pay its current liabilities using liquid assets (assets that can be quickly converted to cash).

The formula is:

$$\text{Liquid Ratio} = \frac{\text{Liquid Assets}}{\text{Current Liabilities}}$$Liquid Ratio=Current LiabilitiesLiquid Assets​

Liquid Assets are calculated by excluding inventories and prepaid expenses from current assets, as these cannot be quickly converted to cash.

Calculation of Liquid Assets:

Liquid Assets = Current Assets - Inventories - Prepaid Expenses

Liquid Assets = Rs. 80,000 - Rs. 20,000 - Rs. 5,000 - Rs. 5,000 = Rs. 50,000

Note: Advance tax is not deducted as it is already a liquid asset (payment made in advance).

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Calculation of Liquid Ratio:

$$\text{Liquid Ratio} = \frac{50,000}{50,000} = \frac{1}{1} = 1:1$$Liquid Ratio=50,00050,000​=11​=1:1

The liquid ratio is 1:1, which means for every rupee of current liability, the business has one rupee of liquid assets available.

Correct Option: 3 (1:1)