Following is the Balance Sheet of Crescent Chemical Works Limited as at 31st March, 2019:
|
Particulars |
Note |
₹ |
| 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`
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.
