QUESTION RELATED TO BANKING
1. WHY CURRENT RATIO OF BANKS IS LESS THEN ITS QUICK RATIO?
ANS: It is because while calculating quick ratio we use quick assets instead of current assets as well as quick liabilities instead of current liabilities.
we have quick assets = current assets - inventory - prepayments
and quick liabilities= current liabilities- bank overdrafts
We have no inventory or very less inventory in banks, so the numerator remains almost same but there are large amounts of bank overdraft so the denominator decreases which result in higher quick ratio.
In most of the industries other than banking we used current liabilities instead of quick liabilities so if we use current liabilities then quick ratio will be equal or less then current ratio.
2. WHY DEBT/EQUITY RATIO OF BANKS IS RELATIVELY HIGHER THAN OTHER COMPANIES?
ANS: Banks are those institutions which accepts deposits from the customer and deposits of banks are very high in comparison to its paid up capital. Deposits are liabilities for the bank so that the total liabilities for the banks becomes far more then that of its paid up capital(equity) , thus debt equity ratio of banks is relatively higher then that of other companies.
1. WHY CURRENT RATIO OF BANKS IS LESS THEN ITS QUICK RATIO?
ANS: It is because while calculating quick ratio we use quick assets instead of current assets as well as quick liabilities instead of current liabilities.
we have quick assets = current assets - inventory - prepayments
and quick liabilities= current liabilities- bank overdrafts
We have no inventory or very less inventory in banks, so the numerator remains almost same but there are large amounts of bank overdraft so the denominator decreases which result in higher quick ratio.
In most of the industries other than banking we used current liabilities instead of quick liabilities so if we use current liabilities then quick ratio will be equal or less then current ratio.
2. WHY DEBT/EQUITY RATIO OF BANKS IS RELATIVELY HIGHER THAN OTHER COMPANIES?
ANS: Banks are those institutions which accepts deposits from the customer and deposits of banks are very high in comparison to its paid up capital. Deposits are liabilities for the bank so that the total liabilities for the banks becomes far more then that of its paid up capital(equity) , thus debt equity ratio of banks is relatively higher then that of other companies.
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