Category: Dictionary

Balance sheet is one of the important financial statements which a joint stock company has to prepare at the end of every financial year. It is a summarized report of assets, liabilities and shareholders’s funds of a company. The balance sheet can be used to access the current position of a company.

Future contract is a standardized agreement between two parties. This contract allows both the parties (buyer and seller) to buy or sell an underlying asset on a future date at a price agreed today.

The price agreed today simply refers to the date on which both the parties enter into the contract. The underlying assets used in these contracts can be any financial instruments or physical commodities.

It should be noted here that future contracts are special type of forward contracts and possess many common characteristics.

Unlike forward contract, future contracts are traded on exchanges generally known as future exchanges. These contracts are more liquid than the forward contracts as the settlement takes place on daily basis. In the daily basis settlement, investors who incur losses, pay them every day to investors who make profits.

Forward contract is a customized agreement between two parties (buyer and seller) to buy or sell an underlying asset. The transaction takes place on a future date but at a price agreed today. The term ‘agreed today’ simply refers to the date on which two parties enter into the contract.

It should be noted here that like future contract, forward contract is also one of the important types of derivatives.

Unlike future contracts, forward contracts takes place over the counter. It means that there is not such a financial exchange where forward contracts can be traded. As opposed to future contract, these contracts are settled on a specific date agreed by the parties.

 

One of the important liquidity ratios, quick ratio is used to gauge the short term liquid position of a firm. This ratio establishes a relationship between liquid assets and current liabilities of a company. It is done to find out the efficiency of a business enterprise to pay it’s short term debt obligation.

This ratio is different from current ratio in sense that current ratio takes into consideration, all the current assets of a company while making a comparison with current liabilities. On the other hand, amount of inventory and prepaid expenses (which constitute a major part of current assets) are not taken into consideration while calculating this ratio.

Important formulas for calculating quick ratio:

This ratio can be calculated by dividing liquid assets by the amount of current liabilities, as shown below:

Current liabilities can also be substituted by liquid liabilities. In this case formula will be:

This ratio is also known as ‘acid test ratio’ or ‘liquid ratio’.

Accounting is a systematic process of recording, summarizing, analyzing and reporting all business transactions of a firm.