Page 56 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 4: Ratio Analysis

Stock 2,40,000 Notes
Current Liabilities:
Sundry Creditors 3,00,000
Bills Payable 1,00,000
Solution:

Current Assets ` 8,00,000
Current Ratio = = = 2
Current Liabilities ` 4,00,000
Solved Problems for Practice
1. Liquid Assets `65,000; Stock `20,000; Prepaid expenses `5,000; Working capital `60,000.
Calculate the current assets ratio and liquid assets ratio.
For the computation of current assets ratio, the current assets volume must be known.
It is not available in our problem; instead the liquid assets and prepaid expenses are given
together which will help to find the total volume of current assets.

Current Assets = Liquid Asset + Prepaid expenses + Closing stock

= `65,000 + `5,000 + 20,000
= `90,000
The next step is to find out the current liabilities. The volume of current liabilities could be

found out through the available information of working capital.
Net working capital = Current Assets- Current Liabilities
`60,000 = `90,000-Current liabilities
Current liabilities = `90,000-`60,000 = `30,000
From the above, the current ratio could be found out.

Current Ratio = `90,000 = 3 > 2
`30,000

The fi rm satisfies more than the norm of the current ratio. It means that the fi rm keeps
excessive current assets more than that of requirement.

Quick Assets Ratio = `65,000 = 2.17
`30,000

The firm keeps more liquid assets than that of the specified norm, meaning that excessive

liquid assets are held by the firm than the requirement in the form of idle assets not
productive in utility.
2. The current ratio of Bicon Ltd. is 4:5:1 and liquidity ratio is 3:1; stock is `6,00,000. Find out
the current liabilities.
To fi nd out the volume of current liabilities, initially the share of closing stock should be
found out in the total of current assets.
Share of stock = Current Assets Ratio- Liquid Assets Ratio

= 4.5-3.0 = 1.5
Share of the stock = 1.5
If the share of the stock is 1.5, which amounted to `6,00,000.

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