Immediate Solvency Ratio

Do, you know immediate solvency ratio? No, but if I tell you some clues about this, I think, you can tell me what does this solvency ratio show?

1st Clue

This ratio is calculated for knowing the Short Term Financial Position.

2nd Clue

This ratio is calculated from Balance Sheet's Information.

Above two clues are enough to know about immediate solvency ratio. If you are not wrong, you are thinking about liquid ratio or quick ratio.

Yes, immediate solvency ratio is liquid ratio or quick ratio which is calculated for knowing the short term financial position and it is also calculate from liquid assets and current liabilities. Both information can only be found through making of balance sheet.

Immediate Solvency Ratio = Liquid assets / Current liabilities

{*} Note

Liquid assets

1.  Cash
2. Bank
3. Sundry debtors
4. Short term investments

In liquid assets, we will not include inventory and prepaid expenses or if current assets are given, then for calculating liquid asset, deduct inventory and prepaid expenses from current assets.

Current Liabilities

1. Sundry creditors
2. Bills payable
3. Outstanding expenses
4. Short term advances
5.  Income tax payable
6. Dividends payable
7. Bank overdraft

As a convention, generally, immediate solvency ratio or quick ratio of "one to one" (1:1) is considered to be satisfactory.