Ratio Analysis  Liquidity Ratios

Calculate Current Ratio from the following information:
Inventories  50,000
Trade receivables  50,000
Advance tax  4,000
Cash and cash equivalents  30,000
Trade payables  1,00,000
Shortterm borrowings (bank overdraft)  4,000
a. 1:1.21
b. 1:1.29
c. 1.21:1
d. 1.29:1
Ans  d
Solution:
Current Ratio = Current Assets/Current Liabilities
Current Assets = Inventories + Trade receivables + Advance tax + Cash and cash equivalents
= Rs. 50,000 + Rs. 50,000 + Rs. 4,000 + Rs. 30,000
= Rs. 1,34,000
Current Liabilities = Trade payables + Shortterm borrowings
= Rs. 1,00,000 + Rs. 4,000
= Rs. 1,04,000
Current Ratio = Rs.1,34,000/Rs.1,04,000
=1.29:1
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Calculate the current ratio from the following information:
Total assets = Rs. 3,00,000
Noncurrent liabilities = Rs. 80,000
Shareholders’ Funds = Rs. 2,00,000
NonCurrent Assets:
Fixed assets = Rs. 1,60,000
Noncurrent Investments = Rs. 1,00,000
a. 1:1.5
b. 1:2
c. 1.5:1
d. 2:1
Ans  d
Solution:
Total assets = Noncurrent assets + Current assets
Rs. 3,00,000 = Rs. 2,60,000 + Current assets
Current assets = Rs. 3,00,000 – Rs. 2,60,000 = Rs. 40,000
Total assets = Equity and Liabilities
= Shareholders’ Funds + Noncurrent liabilities + Current liabilities
Rs. 3,00,000 = Rs. 2,00,000 + Rs. 80,000 + Current Liabilities
Current liabilities = Rs. 3,00,000 – Rs. 2,80,000 = Rs. 20,000
Current Ratio = Current Assets/Current Liabilities
= Rs. 40,000/Rs. 20,000
= 2:1
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Calculate quick ratio from the following information:
Inventories  50,000
Trade receivables  50,000
Advance tax  4,000
Cash and cash equivalents  30,000
Trade payables  1,00,000
Shortterm borrowings (bank overdraft)  4,000
a. 1:0.66
b. 1:0.77
c. 0.66:1
d. 0.77:1
Ans  d
Solution:
Quick Ratio = Quick Assets/Current Liabilities
Quick Assets = Current assets – (Inventories + Advance tax)
= Rs. 1,34,000 – (Rs. 50,000 + Rs. 4,000)
= Rs. 80,000
Current Liabilities = Trade payables + Shortterm borrowings
= Rs. 1,00,000 + Rs. 4,000
= Rs. 1,04,000
Quick Ratio = Rs. 80,000/Rs. 1,04,000
= 0.77:1
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Calculate ‘Liquidity Ratio’ from the following information:
Current liabilities = Rs. 50,000
Current assets = Rs. 80,000
Inventories = Rs. 20,000
Advance tax = Rs. 5,000
Prepaid expenses = Rs. 5,000
a. 1:1.5
b. 1:1.33
c. 1:1
d. 1.33:1
Ans  c
Solution :
Liquidity Ratio = Liquid Assets/Current Liabilities
Liquidity Assets = Current assets –(Inventories + Prepaid expenses + Advance tax)
= Rs. 80,000 – (Rs. 20,000 + Rs. 5,000 + Rs. 5,000)
= Rs. 50,000
Liquidity Ratio = Rs. 50,000/Rs. 50,000
= 1:1
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X Ltd., has a current ratio of 3.5:1 and quick ratio of 2:1. If excess of current assets over quick assets represented by inventories is Rs. 24,000, calculate
current assets and current liabilities.
a. 42000, 12000
b. 49000, 14000
c. 56000, 16000
d. 63000, 18000
Ans  c
Solution :
Current Ratio = 3.5:1
Quick Ratio = 2:1
Let Current liabilities = x
Current assets = 3.5x
and Quick assets = 2x
Inventories = Current assets – Quick assets
24,000 = 3.5x – 2x
24,000 = 1.5x
x = Rs.16,000
Current Liabilities = Rs.16,000
Current Assets = 3.5x = 3.5 × Rs. 16,000 = Rs. 56,000.
Verification :
Current Ratio = Current assets : Current liabilities
= Rs. 56,000 : Rs. 16,000
= 3.5 : 1
Quick Ratio = Quick assets : Current liabilities
= Rs. 32,000 : Rs. 16,000
= 2 : 1
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