Calculate Current Assets using Accounting Ratios

Let's break down the steps to calculate Current Assets using the provided information about different financial ratios.

Understanding the Given Information

• Inventory Turnover Ratio = 4 times
• Closing inventory is ₹20,000 more than opening inventory
• Revenue from operations = ₹3,00,000
• Gross Profit Ratio = 20% of revenue from operations
• Current Liabilities = ₹40,000
• Quick Ratio = 0.75

Step 1: Calculate Gross Profit

The Gross Profit is 20% of Revenue from Operations.

Revenue from Operations \( = ₹3,00,000 \)

Gross Profit Ratio \( = 20\% \)

Gross Profit \( = \text{Revenue from Operations} \times \text{Gross Profit Ratio} \)

Gross Profit \( = ₹3,00,000 \times \frac{20}{100} \)

Gross Profit \( = ₹60,000 \)

Step 2: Calculate Cost of Revenue from Operations (COGS)

Cost of Revenue from Operations (also known as Cost of Goods Sold) is calculated by deducting Gross Profit from Revenue from Operations.

Cost of Revenue from Operations \( = \text{Revenue from Operations} - \text{Gross Profit} \)

Cost of Revenue from Operations \( = ₹3,00,000 - ₹60,000 \)

Cost of Revenue from Operations \( = ₹2,40,000 \)

Step 3: Calculate Average Inventory

The Inventory Turnover Ratio formula relates Cost of Revenue from Operations to Average Inventory.

Inventory Turnover Ratio \( = \frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}} \)

We are given: Inventory Turnover Ratio \( = 4 \) times

We calculated: Cost of Revenue from Operations \( = ₹2,40,000 \)

Substitute these values into the formula:

\( 4 = \frac{₹2,40,000}{\text{Average Inventory}} \)

Rearrange the formula to solve for Average Inventory:

Average Inventory \( = \frac{₹2,40,000}{4} \)

Average Inventory \( = ₹60,000 \)

Step 4: Calculate Closing Inventory

We know the relationship between opening and closing inventory and the Average Inventory.

Let Opening Inventory \( = x \)

Closing Inventory \( = x + ₹20,000 \)

Average Inventory \( = \frac{\text{Opening Inventory} + \text{Closing Inventory}}{2} \)

Substitute the values:

\( ₹60,000 = \frac{x + (x + ₹20,000)}{2} \)

\( ₹60,000 = \frac{2x + ₹20,000}{2} \)

\( ₹60,000 \times 2 = 2x + ₹20,000 \)

\( ₹1,20,000 = 2x + ₹20,000 \)

\( 2x = ₹1,20,000 - ₹20,000 \)

\( 2x = ₹1,00,000 \)

\( x = \frac{₹1,00,000}{2} \)

\( x = ₹50,000 \) (This is Opening Inventory)

Closing Inventory \( = x + ₹20,000 \)

Closing Inventory \( = ₹50,000 + ₹20,000 \)

Closing Inventory \( = ₹70,000 \)

Step 5: Calculate Quick Assets

The Quick Ratio (also known as the Liquid Ratio) relates Quick Assets to Current Liabilities.

Quick Ratio \( = \frac{\text{Quick Assets}}{\text{Current Liabilities}} \)

We are given: Quick Ratio \( = 0.75 \)

We are given: Current Liabilities \( = ₹40,000 \)

Substitute these values into the formula:

\( 0.75 = \frac{\text{Quick Assets}}{₹40,000} \)

Rearrange the formula to solve for Quick Assets:

Quick Assets \( = 0.75 \times ₹40,000 \)

Quick Assets \( = ₹30,000 \)

Step 6: Calculate Current Assets

Quick Assets are Current Assets minus Inventory. For the Quick Ratio calculation, the inventory excluded is typically the Closing Inventory.

Quick Assets \( = \text{Current Assets} - \text{Inventory} \)

Quick Assets \( = \text{Current Assets} - \text{Closing Inventory} \)

We calculated: Quick Assets \( = ₹30,000 \)

We calculated: Closing Inventory \( = ₹70,000 \)

Substitute these values into the formula:

\( ₹30,000 = \text{Current Assets} - ₹70,000 \)

Rearrange the formula to solve for Current Assets:

Current Assets \( = ₹30,000 + ₹70,000 \)

Current Assets \( = ₹1,00,000 \)

Thus, the calculated value for Current Assets is ₹1,00,000.

Revision Table: Key Financial Ratios

Additional Information on Current Assets and Liquidity Ratios

Current Assets are assets that are expected to be converted into cash, used, or consumed within one year or within the normal operating cycle of the business, whichever is longer. Examples include cash, accounts receivable, inventory, and prepaid expenses.

Liquidity Ratios are financial ratios that measure a company's ability to meet its short-term obligations. The Quick Ratio and Current Ratio are common liquidity ratios.

• Current Ratio: Calculated as Current Assets / Current Liabilities. It measures the ability to pay short-term liabilities using all current assets.
• Quick Ratio: Calculated as (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities. It measures the ability to pay short-term liabilities using the most liquid assets (excluding inventory and prepaid expenses), as these are considered less liquid than cash or receivables.

In this problem, we used the relationship between Current Assets, Quick Assets, and Closing Inventory to find the value of Current Assets after calculating Quick Assets using the Quick Ratio and Closing Inventory using the Inventory Turnover Ratio and the inventory relationship.