Question

A firm has a current ratio of 3.5:1 and a quick ratio of 2:1. Assuming inventory at ₹96,000, find out total current assets and total current liabilities.

Hint:

In financial ratio analysis, the current ratio includes all current assets, while the quick ratio excludes inventory to assess the company’s liquidity.

Answer 1

Step 1: Understanding the Ratios. 
- The current ratio is the ratio of total current assets to total current liabilities. We are given that: \[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = 3.5:1 \] This means that for every ₹1 of liabilities, the company has ₹3.5 of assets. 
- The quick ratio is the ratio of liquid assets (current assets excluding inventory) to current liabilities. We are given that: \[ \text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}} = 2:1 \] This means that for every ₹1 of liabilities, the company has ₹2 of liquid assets. 
Step 2: Let’s assume Current Liabilities as \( x \). 
From the current ratio, we know that: \[ \text{Current Assets} = 3.5x \] Step 3: Use the Quick Ratio. 
From the quick ratio, we know that: \[ \text{Current Assets} - \text{Inventory} = 2x \] Substitute the value of current assets from the previous equation: \[ 3.5x - 96,000 = 2x \] Step 4: Solve for \( x \). 
\[ 3.5x - 2x = 96,000 \] \[ 1.5x = 96,000 \] \[ x = \frac{96,000}{1.5} = 64,000 \] Step 5: Calculate Current Assets. 
Now that we know \( x \), the current liabilities, we can calculate the current assets: \[ \text{Current Assets} = 3.5x = 3.5 \times 64,000 = 2,24,000 \] Step 6: Conclusion. 
Thus, the total current liabilities are ₹64,000, and the total current assets are ₹2,24,000.