Question

The ratio of Current Assets (₹ 5,00,000) to Current Liabilities is 2.5 : 1. The accountant of this firm is interested in maintaining a Current Ratio of 2 : 1 by acquiring some Current Assets on Credit. You are required to suggest him the amount of Current Assets which must be acquired for this purpose.

Answer 1

Current Ratio = `"Current Assets"/"Current Liabilities"`

2.5 = `(₹ 5,00,000)/("Current Liabilities")`

Current Liabilities = `(₹ 5,00,000)/2.5`

= ₹ 2,00,000

Let’s assume the amount of Current Assets to be acquired as x to maintain a Current Ratio of 2 : 1.

Current Assets = ₹ 5,00,000 + x

Current Liabilities = ₹ 2,00,000 + x

Current Ratio = `"Current Assets"/"Current Liabilities"`

2 = `(₹ 5,00,000 + x)/(₹ 2,00,000 + x)`

2(₹ 2,00,000 + x) = ₹ 5,00,000 + x

₹ 4,00,000 + 2x = ₹ 5,00,000 + x

2x − x = ₹ 5,00,000 − ₹ 4,00,000

x (Current Assets) = ₹ 1,00,000

Therefore, Current Assets of ₹ 1,00,000 must be acquired on credit to maintain a Current Ratio of 2 : 1.