Practice Question 1

1. From the following compute (a) Current Ratio (b) Quick Ratio:
Particulars `
Current Investment 80,000
Non-Current Investment 2,00,000
Inventories 4,10,000
Trade Receivables 3,30,000
Short Term Loans and Advances 10,000
Trade Payables 1,80,000
Short term Borrowings 60,000
Long Term Borrowings 3,00,000
Prepaid Insurance 18,000
Advance Payment of Tax 20,000
Cash and Equivalents 28,000
Short Term Provisions 25,000
Other Current Liabilities 15,000

Solution
Current Assets
Current Ratio =
Current Liabilities
Current Assets = Current Investments + Inventories (except loose tools) + Trade Receivables + Short
term loans & Advances + Prepaid Insurance + Advance Payment of Tax + cash and cash equivalents.
= ` 80,000 + ` 4,10,000 + ` 3,30,000 + ` 10,000 + ` 18,000 + ` 20,000 + ` 28,000
= ` 8,96,000
Current liabilities = Trade Payables + Short term Borrowings + short term provisions + Other Current
Liabilities.
= `1,80,000 + ` 60,000 + ` 25,000 + ` 15,000 = ` 2,80,000
8,96,000
Current Ratio = = 3.2 : 1
2,80,000
Liquid/Quick Assets
Quick Ratio =
Current Liabilities
Liquid Assets: Current Assets – Inventories – Prepaid Insurance – Advance Payment of Tax
= ` 8,96,000 – `4,10,000 – `18,000 – `20,000 = ` 4,48,000
4,48,000
Quick Ratio = = 1.6 : 1
2,80,000

Practice Question 2
The ratio of current Assets (` 32,00,000) to Current liabilities (` 20,00,000) is 1.6:1. The
accountant of the firm is interested in maintaining a Current Ratio 2:1, by paying off a part of
 the Current Liabilities. Compute the amount of the Current Liabilities that should be paid, so
that the Current ratio at the level 2:1 may be maintained.
SOLUTION
It if given that the Current Ratio of the company is 2.
Payment of existing liabilities would result in a decrease of both current assets and current
liabilities.
Suppose the amount of current liabilities is = x
Current Ratio = (Current Assets)/(Current Liabilities)
Current Ratio = (` 32,00,000-x)/( ` 20,00,000-x)
2 = (`32,00,000-x)/( `20,00,000-x)
2 × (` 20,00,000-x) = `32,00,000-x
` 40,00,000 – 2 x=32,00,000- x
` 40,00,000 – 32,00,000=2 x- x
` 8,00,000 = x
To reach a Current Ratio of 2:1, current liabilities to the extent of ` 8,00,000 should be charged.
Practice Question 3
The debt equity ratio of X Ltd. is 1:2. Which of the following would increase/decrease or not change
the debt equity ratio?
(a) Issue of new equity shares
(b) Cash received from debtors
(c) Sale of fixed assets at a profit
(d) Redemption of debentures
(e) Purchase of goods on credit.
Solution
a) The ratio will decrease. This is because the debt remains the same, equity increases.
b) The ratio will not change . This is because neither the debt nor equality is affected.
c) The ratio will decrease . This is because the debt remains unchanged while equity increases
by the amount of profit.
d) The ratio will decrease . This is because debt decreases while equity remains same .
e) The ratio will not change . This is because neither the debt nor equity is affected.
Practice Question 4
Current Assets of a company are Rs. 10,00,000 and current liabilities are ` 6,00,000. The management
is interested in making the ratio 2:1 by making payment of certain current liabilities. Advise the
management as to how much of current liabilities should be paid to attain the desired ratio.
Solution
Let the current liabilities to be paid = x
Then, (10,00,000-x )/ (6,00,000-x) = 2
ie; 10,00,000-x = 2(6,00,000-x )
 10,00,000-x = 12,00,000-2x
x = 2,00,000
Therefore; Amount of current liabilities should be paid to attain the desired ratio is `2,00,000
Practice Question 5
From the following information, calculate current ratio.
Trade receivables (debtors) `1, 00,000, Bills payable ` 20,000 Prepaid Expenses `10,000,
Sundry Creditors ` 40,000, Cash and cash equivalents `30,000 ` Debentures `2,00,000,
Short term investments `20,000, Inventories `40,000, Machinery `7,000, Expenses Payable
`40,000.
Solution:
Current Ratio = Current Assets / Current Liabilities
= 2, 00,000 / 1, 00,000 = 2 : 1
Current Assets = Trade Receivables (sundry Debtors) + prepaid Expenses + cash and cash
Equivalents + short term Investments + inventories
= 1,00,000 + 10,000 + 30,000 + 20,000 + 40,000 = 2,00,000
Current Liabilities = Trade payables (Bills Payable + sundry creditors) + expenses
payable
= 20,000 + 40,000 + 40,000 = 1, 00,000
Practice Question 6

Calculate ‘Liquidity Ratio’ from the following information:

Current liabilities = `50,000 Current assets = ` 80,000
Inventories = `20,000 Advance tax = ` 5,000
Prepaid expenses = `5,000
Solution:
Liquidity Ratio = Liquid Assets/Current Liabilities
Liquidity Assets = Current assets − (Inventories + Prepaid expenses + Advance tax)
= `80,000 − (`20,000 + `5,000 + `5,000)
= `50,000
Liquidity Ratio = `50,000 / 50,000 = 1 : 1.
Practice Question 7

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 `24,000, calculate current assets and current liabilities.
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
Current Liabilities = `16,000
Current Assets = 3.5x = 3.5 × `16,000 = `56,000.
 Verification:
Current Ratio = Current assets : Current liabilities
= `56,000 : `16,000 = 3.5: 1
Quick Ratio = Quick assets : Current liabilities
= `32,000 : `16,000 = 2 : 1
Practice Question 8
From the following information calculate Debt equity Ratio:-
Share capital: 10,000 shares of 10 each `1,00,000
Debentures `75,000
General Reserve `45000
Long term provision `25,000
Surplus `30,000
Outstanding Expenses `10,000
Solution:
Debt to equity ratio = Debt / Equity (shareholder funds)
= 1,00,000 / 1,75,000 = 0.57 : 1
Debt = Debentures + Long term provisions
= `75,000 + `25,000 =`1,00,000
Equity = Share Capital + General Reserve + Surplus
= `1,00,000 + `45,000 + `30,000 = `1,75,000
Practice Question 9
Shareholders’ Funds `1,40,000, Total Debts `18,00,000 and Current Liabilities = `2,00,000.
Calculate total Assets to Debt ratio.
Solution:
Total Assets to Debt Ratio = Total Assets / Long term Debts
= `32,00,000 / `16,00,000 = 2 : 1
Long term debts = Total Debts (Liabilities) − Current Liabilities
= `18,00,000 − `2,00,000 = `16,00,000
Total assets = shareholder funds + total debts (liabilities)
Practice Question 10
Quick Ratio 1.5; Current Assets `1,00,000; Current Liabilities `40,000. Calculate the value of
Inventory.
SOLUTION
It is given that,
Quick ratio = 1.5 Current Liabilities= `40,000;
Formula of Quick Ratio:-
Quick Ratio = (liquid Assets)/(Current Liabilities)
1.5 = (liquid Assets)/( `40,000)
Liquid Assets = `40,000 × 1.5 = `60,000
Inventory – Current Assets- Liquid Assets
Inventory = `1,00,000 – `60,000
Inventory = `40,000.
So, the value of Inventory is `40,000.