Question

A business has a Current Ratio of 4 : 1 and a Quick Ratio of 1.2 : 1. If the Working Capital is ₹ 1,80,000, calculate the total Current Assets and Inventory.

Answer 1

(i) Working Capital = Current Assets − Current Liabilities

Current Ratio of the company is 4 : 1, therefore, based on the current ratio, the working capital is 4 − 1 = 3.

If Working Capital is 3, Current Assets = 4

If Working Capital is 1, Current Assets = `4/3`

If Working Capital is ₹ 1,80,000,

Current Assets = `4/3 xx 1,80,000`

= ₹ 2,40,000

(ii) Current Liabilities = Current Assets − Working Capital

= ₹ 2,40,000 − ₹ 1,80,000

= ₹ 60,000

(iii) Quick Ratio = `"Quick Assets"/"Current Liabilities"`

1.2 = `("Quick Assets")/(₹ 60,000)`

Quick Assets = ₹ 60,000 × 1.2

= ₹ 72,000

Inventory = Current Assets − Quick Assets

= ₹ 2,40,000 − ₹ 72,000

= ₹ 1,68,000