Question

Following is the Balance Sheet of Crescent Chemical Works Limited as at 31st March, 2019:

Particulars	Note No.	₹
I. EQUITY AND LIABILITIES : 1. Shareholder's Funds :
(a) Share Capital		70,000
(b) Reserves and Surplus		35,000
2. Non-Current Liabilities :
Long-term Borrowings		25,000
3. Current Liabilities :
(a) Short-term Borrowings		3,000
(b) Trade Payables (Creditors)		13,000
(b) Short-term Provisions: Provision for Tax		4,000
Total		1,50,000
II. ASSETS :
1. Non-Current Assets
(a) Fixed Assets (Tangible)		45,000
(b) Non-current Investments		5,000
2. Current Assets
(a) Inventories (Stock)		50,000
(b) Trade Receivables (Debtors)		30,000
(c) Cash and Cash Equivalents		20,000
Total		1,50,000

Compute Current Ratio and Liquid Ratio  

Answer 1

Current Assets = Inventory + Trade Receivables + Cash and Cash Equivalents

= 50,000 + 30,000 + 20,000 = 1,00,000

Current Liabilities = Short-term Borrowings + Trade Payables + Provision for Tax

= 3,000 + 13,000 + 4,000 = 20,000

Quick Assets = Trade Receivables + Cash and Cash Equivalents

= 30,000 + 20,000 = 50,000

`"Current Ratio" = "Current Assets"/ "Current liability" = 100000/20000 = 5 : 1`

`"Quick Ratio" = "Liquid  Assets"/"Current Liabilities" = 50000/20000 = 2.5 : 1`

Comments:

1. Ideal Current Ratio for a business is considered to be 2:1. But in this case the ratio is quite high i.e. 5:1. This may be due to the following reasons:

(i) Blockage of Funds in Stock

(ii) High Amount outstanding from Debtors

(iii) Huge Cash and Bank Balances

2. Ideal Quick Ratio of a business is supposed to be 1:1. This implies that Liquid Assets should be equal to the Current Liabilities. But in the given case Quick Ratio is 2.5 : 1 which indicates that the Liquid Assets are quite high in comparison to the Current Liabilities.