Question

A firm had Current Liabilities of ₹ 5,40,000. It purchased stock of 60,000 on credit. After the purchase of stock, Current Ratio was 2 : 1. Calculate Current Assets and Working Capital after and before the stock was purchased.

Answer 1

Given:

• Initial Current Liabilities = ₹ 5,40,000
• Stock purchased on credit = ₹ 60,000
• Current Ratio after purchase = $2 : 1$

1. Calculations AFTER the purchase of stock:

When stock is purchased on credit, both Current Assets (Inventory) and Current Liabilities (Creditors) increase by the exact same amount (₹ 60,000).

$$\begin{aligned} \text{Current Liabilities (After)} &= \text{Initial Current Liabilities} + \text{Credit Purchase} \\ &= 5,40,000 + 60,000 \\ &={₹\ 6,00,000} \end{aligned}$$

We know that:
$$\text{Current Ratio (After)} = \frac{\text{Current Assets (After)}}{\text{Current Liabilities (After)}}$$

Substituting the values:
$$\begin{aligned} \frac{2}{1} &= \frac{\text{Current Assets (After)}}{6,00,000} \\ \text{Current Assets (After)} &= 6,00,000 \times 2 \\ &= {₹\ 12,00,000} \end{aligned}$$ 

Now, calculating Working Capital after the purchase:
$$\begin{aligned} \text{Working Capital (After)} &= \text{Current Assets (After)} - \text{Current Liabilities (After)} \\ &= 12,00,000 - 6,00,000 \\ &= {₹\ 6,00,000} \end{aligned}$$

2. Calculations BEFORE the purchase of stock:

To find the values before the transaction, we subtract the ₹ 60,000 increase from our "After" figures.

$$\begin{aligned} \text{Current Assets (Before)} &= \text{Current Assets (After)} - \text{Stock Purchased} \\ &= 12,00,000 - 60,000 \\ &= {₹\ 11,40,000} \end{aligned}$$

$$\begin{aligned} \text{Current Liabilities (Before)} &= {₹\ 5,40,000} \quad \text{(As given in the problem)} \end{aligned}$$

Now, calculating Working Capital before the purchase:
$$\begin{aligned} \text{Working Capital (Before)} &= \text{Current Assets (Before)} - \text{Current Liabilities (Before)} \\ &= 11,40,000 - 5,40,000 \\ &= {₹\ 6,00,000} \end{aligned}$$