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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

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  

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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`

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.

  Is there an error in this question or solution?
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APPEARS IN

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