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

Sum

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

 Particulars NoteNo. ₹ 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

#### Solution

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

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.

Is there an error in this question or solution?

#### APPEARS IN

TS Grewal Class 12 Accountancy - Analysis of Financial Statements
Chapter 3 Accounting Ratios
Exercise | Q 31 | Page 94