Question

Ratio of Current Assets (₹8,75,000) to Current Liabilities (₹3,50,000) is 2.5:1 The firm wants to maintain Current Ratio of 2:1 by purchasing goods on credit. Compute amount of goods that should be purchased on credit.

Answer 1

Current Assets = Rs 8,75,000
Current Liabilities = Rs 3,50,000
Current Ratio = 2.5:1
The business is interested to maintain its Current Ratio at 2:1 by purchasing goods on credit.
Let the amount of goods purchased on credit be ‘x’
Current Liabilities = Rs 3,50,000 + x
Current Assets = Rs 8,75,000 + x

`"Current Ratio" = "Current Assets"/ "Current liability" = (875000 + x)/(350000 + x) = 2/1`

8,75,000 + x = 7,00,000 + 2x
8,75,000 – 7,00,000 = 2x – x
1,75,000 = x

Therefore, goods worth Rs 1,75,000 must be purchased on credit to maintain the current ratio at 2:1.