Question

The Current ratio and Liquid ratio of Vishu Ltd. are 2.5 : 1 and 1.2 : 1 respectively. Calculate Liquid Assets and Current Liabilities if there is Inventory (including Loose tools of ₹ 30,000) of ₹ 6,62,000 and Prepaid Expenses of ₹ 18,000.

Answer 1

Inventory (excluding Loose Tools) = ₹ 6,62,000 − ₹ 30,000 = ₹ 6,32,000

Current Ratio is 2.5 and Liquid ratio is 1.2. Difference between Current ratio and liquid ratio is inventory and prepaid expenses. Therefore, inventory and prepaid expenses are 2.5 − 1.2 = 1.3.

If Inventory and prepaid expenses are 1.3,

Current Assets = 2.5

If Inventory and prepaid expenses are 1,

Current Assets = `2.5/1.3`

If inventory and prepaid expenses are 6,50,000,

Current Assets = `2.5/1.3 xx 6,50,000`

= ₹ 12,50,000

As Current Ratio is 2.5 : 1 and Current Assets are ₹ 12,50,000

Current Liabilities = `(₹ 12,50,000)/2.5`

= ₹ 5,00,000

Liquid Assets = Current Assets − Inventories (excl. loose tools) − Prepaid Expenses

= ₹ 12,50,000 − ₹ 6,32,000 − ₹ 18,000

= ₹ 6,00,000