Question

A business has a current ratio of 3:1 and quick ratio of 1.2:1. If working capital is \rupee 1,80,000, calculate total current assets and inventory.

Hint:

Use the working capital formula along with ratios to calculate unknown values. Always cross-check results with both the current ratio and quick ratio formulas.

Answer 1

Step 1: Formula for current ratio $$\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}.$$ Given Current Ratio = 3:1, we know Current Assets = 3 × Current Liabilities.
Step 2: Calculating Current Liabilities $$\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}.$$ $$1,80,000 = 3 \times \text{Current Liabilities} - \text{Current Liabilities}.$$ $$1,80,000 = 2 \times \text{Current Liabilities}.$$ \[ \text{Current Liabilities} = \rupee 90,000. \] Step 3: Calculating Total Current Assets \[ \text{Current Assets} = 3 \times \rupee 90,000 = \rupee 2,70,000. \] Step 4: Formula for Quick Ratio $$\text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}}.$$ \[ 1.2 = \frac{\rupee 2,70,000 - \text{Inventory}}{\rupee 90,000}. \] \[ \rupee 1,08,000 = \rupee 2,70,000 - \text{Inventory}. \] \[ \text{Inventory} = \rupee 1,50,000. \] Thus, Total Current Assets = \rupee 2,70,000 and Inventory = \rupee 1,50,000.