Question 2 of 47intermediate🔧 ApplyNumerical3 marks

Current liabilities of a company are Rs. 5,60,000, current ratio is 2.5:1 and quick ratio is 2:1. Find the value of the Inventories.

Correct Answer

Current Assets = Current Ratio × Current Liabilities = 2.5 × Rs. 5,60,000 = Rs. 14,00,000

Quick Assets = Quick Ratio × Current Liabilities = 2 × Rs. 5,60,000 = Rs. 11,20,000

Inventories = Current Assets – Quick Assets = Rs. 14,00,000 – Rs. 11,20,000 = Rs. 2,80,000

Exercise: Do it Yourself | Q: 1 | (Page 10)
For More Understanding

Explanation

To find the value of Inventories, one must first determine the values of Current Assets and Quick Assets. Using the provided context, Current Assets are derived by multiplying the Current Ratio with Current Liabilities. Similarly, Quick Assets are derived by multiplying the Quick Ratio with Current Liabilities. Finally, Inventories are calculated by deducting Quick Assets from Current Assets, based on the relationship established in Illustration 2.

Solution Steps

  1. Step 1: Calculate Current Assets using the formula: Current Assets = Current Ratio × Current Liabilities = 2.5 × Rs. 5,60,000 = Rs. 14,00,000.

  2. Step 2: Calculate Quick Assets using the formula: Quick Assets = Quick Ratio × Current Liabilities = 2 × Rs. 5,60,000 = Rs. 11,20,000.

  3. Step 3: Calculate Inventories using the formula: Inventories = Current Assets - Quick Assets = Rs. 14,00,000 - Rs. 11,20,000 = Rs. 2,80,000.

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