Current Ratio & Quick Ratio Analysis

This question asks us to calculate the Current Assets and Quick Assets for X Ltd., given specific financial ratios and information about inventories.

Understanding these ratios is key:

• Current Ratio: This ratio shows how well a company can pay its short-term debts using all of its current assets.
  $ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} $
• Quick Ratio (Acid-Test Ratio): This is a more conservative measure, indicating a company's ability to meet its short-term obligations using only its most liquid assets (excluding inventory).
  $ \text{Quick Ratio} = \frac{\text{Quick Assets}}{\text{Current Liabilities}} $
• Inventories: This represents the stock of goods a company holds for sale. It's a component of current assets but not of quick assets. The difference between current assets and quick assets is specifically the inventory value.
  $ \text{Inventories} = \text{Current Assets} - \text{Quick Assets} $

X Ltd. Financial Data Provided

We are given the following information for X Ltd.:

• Current Ratio = 3:1
• Quick Ratio = 2:1
• Inventories = Rs. 5,000

Calculating Current Liabilities

To find the Current Assets and Quick Assets, we first need to determine the Current Liabilities. Let's use variables:

• Let CA = Current Assets
• Let QA = Quick Assets
• Let CL = Current Liabilities
• Let Inv = Inventories

From the given ratios, we can write:

1. $ \text{CA} = 3 \times \text{CL} $
2. $ \text{QA} = 2 \times \text{CL} $

We also know the relationship:

$ \text{Inv} = \text{CA} - \text{QA} $

Substitute the known value of Inventories and the expressions for CA and QA:

$ 5,000 = (3 \times \text{CL}) - (2 \times \text{CL}) $

Simplify the equation:

$ 5,000 = \text{CL} $

Therefore, the Current Liabilities for X Ltd. are Rs. 5,000.

Current Assets Determination

Now that we have the Current Liabilities, we can calculate the Current Assets:

$ \text{CA} = 3 \times \text{CL} $

$ \text{CA} = 3 \times 5,000 $

$ \text{CA} = 15,000 $

So, the Current Assets are Rs. 15,000.

Quick Assets Determination

Similarly, we calculate the Quick Assets:

$ \text{QA} = 2 \times \text{CL} $

$ \text{QA} = 2 \times 5,000 $

$ \text{QA} = 10,000 $

Thus, the Quick Assets are Rs. 10,000.

The calculated values are Current Assets = Rs. 15,000 and Quick Assets = Rs. 10,000.