Question

Calculate Current Assets and Quick Assets of Beeta Ltd. from the following information:

• Quick Ratio = 0.75 : 1
  
• Current Liabilities = 6,00,000
  
• Revenue from Operations = 4,00,000
  
• Gross Profit Ratio = 20% of Revenue from Operations
  
• Inventory Turnover Ratio = 4 times
  
• Closing Inventory is 40,000 more than Opening Inventory
  

Hint:

Quick Ratio excludes inventories and prepaid expenses.
Inventory Turnover Ratio helps estimate average inventory when opening or closing is unknown.

Answer 1

Step 1: Use Quick Ratio to find Quick Assets
\[ \text{Quick Ratio} = \frac{\text{Quick Assets}}{\text{Current Liabilities}} = \frac{x}{6,00,000} \] Given Quick Ratio = 0.75 : 1, so
\[ \frac{x}{6,00,000} = 0.75 \quad \Rightarrow \quad x = 0.75 \times 6,00,000 = 4,50,000 \] \(\Rightarrow\) Quick Assets = 4,50,000
Step 2: Calculate Cost of Revenue (i.e., COGS)
Gross Profit Ratio = 20%
\(\Rightarrow\) COGS = 80% of Revenue
\[ = \frac{80}{100} \times 4,00,000 = 3,20,000 \] Step 3: Use Inventory Turnover Ratio
\[ \text{Inventory Turnover Ratio} = \frac{\text{COGS}}{\text{Average Inventory}} = 4 \] Let opening inventory = \( x \), then closing inventory = \( x + 40,000 \)
\[ \text{Average Inventory} = \frac{x + (x + 40,000)}{2} = \frac{2x + 40,000}{2} = x + 20,000 \] Now, apply turnover ratio: \[ \frac{3,20,000}{x + 20,000} = 4 \quad \Rightarrow \quad x + 20,000 = \frac{3,20,000}{4} = 80,000 \] \(\Rightarrow\) Opening Inventory \( x = 60,000 \)
\(\Rightarrow\) Closing Inventory = \( x + 40,000 = 1,00,000 \)
\(\Rightarrow\) Inventory = 1,00,000 (at end of year, used in current assets)
Step 4: Find Total Current Assets
\[ \text{Current Assets} = \text{Quick Assets} + \text{Closing Inventory} = 4,50,000 + 1,00,000 = 5,50,000 \] \(\Rightarrow\) Current Assets = 5,50,000