Liabilities:

a) Short term liability/ current liability:

– When the bills and loans are to be paid within 1 month then is short term liabilities.

– For ex: payments for labour, fertilizers, electricity, water etc.

– Accumulated bills to be paid within one month also fall under short term liabilities or current liabilities.

b) Medium-term liabilities:

– It is to be paid between 1 month to 1 year.

– Medium term loan and part of long term loan is an example of medium term liabilities. – Medium term payment is an example of medium term liabilities.

c) Long term liabilities:

– All the forms of long type of loan fall under long term liabilities. For ex: mortgage on land.

Note:

I) When the net worth is positive or greater than zero, then the firm is solvent.

ii) Similarly when the net worth is less than zero then the firm is bankrupt or insolvent.

Iii) When the net worth is zero then the firm is just solvent.

Various financial tests or ratios are calculated on the basis of balance sheet

a) Current ratio :

–  Current assets / current liabilities  ( 2 to 3) or > 1

– Reflects the liquidity within one month.

– Indicates the capacity of the farmers to meet immediate financial obligation (liquidity).

– Current ratio indicates ability to pay back its liabilities (debt and account payable) with its assets ( cash, marketable securities, inventory, account receivable)

b) Working ratio:

– (Current assets + working assets) / (Current liabilities + working liabilities)

– Indicates the liquidity position of farm business over an intermediate period of time ( 1 month to 1 year)

c) Net capital ratio = Total assets / Total liabilities

– Indicates the capacity of farm to meet its short term and long term liabilities (financial obligation) or indicates the solvency position of the farmers.

Note :

I) Capital ratio greater than 1 indicates solvent position.

ii) Similarly capital ratio less than 1 indicates bankrupt and capital ratio equal to 1 indicates just solvent.

Iii) If this ratio is greater than 1, then the funds of institutional agencies are safe.

d) Quick ratio or acid test ratio = (cash receipts + accounts receivable + marketable securities available) / current liabilities

  or quick ratio = (Current assets – inventories) / current liabilities

– Indicates how well the company can meet its short term liabilities

– If quick ratio value is 1.5 then it indicates that a farm or company has Rs. 1.50 of liquid assets available to cover each Rs. 1 of the current liabilities.

– Higher the quick ratio, better the company’s liquidity position.

Note:

I) The higher the quick ratio, the better the position of the company.

ii) The commonly acceptable quick ratio is 1.

iii) A company with a quick ratio less than 1 cannot currently pay back its current liabilities; it’s the bad sign for investors and partners.

e) Current liability ratio = Current liability / owner’s equity

– Reflects the farmer’s immediate financial obligation against net worth.

– Ratio smaller indicates consistently good performance.

f) Debt-Equity ratio ( leverage ratio ) = Total debt / owner’s equity

– Reflects the farmer’s total financial obligation against net worth

– A falling ratio indicates good performance of farming and ability of farmer to reduce dependence on borrowing.

g) Equity Value ratio = Owner’s equity / Value of assets

– Indicates the productivity gained by the farmer in relation to the assets he has.

– Improvement in the ratio over years makes it crystal clear regarding the increased strength in the financial position  of the farm business.