- Solvency
23.1. If assets are more than that of ‘out side liabilities’, a company is said to be
solvent.- Liquidity
24.1. If a company can meet its current liabilities out of current assets, it is called
as ‘liquid’.- Working capital
25.1. Working Capital is calculated as:CA - CL = W.C.
Where CA stands for current Assets, CL stands for current liabilities and WC
stands for Working Capital.- Gearing
26.1. Gearing refers to the SHF: BM (LC) where SHF refers to the shareholders’
funds and BM refer to the borrowed money or loan capital.Example 3
Gearing
If gearing is 4:1 it means that proportionality is 4/5 and 1/5 i.e., 4/5 is SHF and 1/5 is
BM. Therefore SHF = 80% and BM = 20%. This is a situation of low gearing that is 4:1,
showing less loan capital and also indicating that there is scope to borrow more money.
The opposite 1:4 is a case of high gearing.
- Comparison
27.1. The balance sheet gives two sets of figures, to compare the current balance
sheet with that of previous balance sheet.27.2. Comparison will serve the purpose of ascertaining the cause for changes.
Such comparison will also help ascertain the sources and uses of funds.27.3. The net working capital is nothing but excess of current assets over current
liabilities. In other words, the net working capital shows liquidity.