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Question
Fine Fabrics Ltd. applied for a short-term loan of ₹ 5 Lac from HDFC Bank. It submitted to the Bank its Statement of Profit & Loss for the year ended 31st March, 2021 and a Balance Sheet as at that date. However, Bank requires certain accounting ratios of the Company for the purpose of analysis of its financial statements.
Following information has been derived from the financial statements of the Company:
| Particulars | ₹ | ₹ |
| Cash & Cash Equivalents | 13,000 | |
| Trade Receivables | 29,000 | 25,000 |
| Less: Provision for Doubtful Debts | 4,000 | |
| Prepaid Insurance | 2,000 | |
| Trade Payables | 30,000 | |
| Bank Overdraft | 10,000 | |
| Opening Inventory | 56,000 | |
| Closing Inventory | 44,000 | |
| Purchases | 92,000 | |
| Revenue from Operations | 1,80,000 | |
| Revenue from Operations Returns | 20,000 | |
| Carriage Inwards | 8,000 | |
| Office Expenses | 8,000 | |
| Selling & Distribution Expenses | 4,000 |
You are required to answer the following questions based on the above stated information:
Acid Test Ratio of the Company will be:
Options
0.95 : 1
1.05 : 1
2.1 : 1
1 : 1
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Solution
0.95 : 1
Explanation:
Acid Test Ratio = `"Liquid Assets"/"Current Liabilities"`
Liquid Assets = Cash & Cash Equivalents + Trade Receivables
= 13,000 + 25,000
= ₹ 38,000
Current Liabilities = Trade Payables + Bank Overdraft
= 30,000 + 10,000
= ₹ 40,000
Acid Test Ratio = `(38,000)/(40,000)`
= 0.95 : 1
