CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis
A firm has current ratio 2.5:1 and quick ratio 1.5:1. Its current liabilities are ₹4,00,000. What is the value of its inventory (assuming no prepaid expenses)?
Inventory is ₹4,00,000. Current assets are 2.5 times ₹4,00,000, i.e. ₹10,00,000, and quick assets are 1.5 times, i.e. ₹6,00,000. The difference of ₹4,00,000 is inventory, since there are no prepaid expenses.
- A₹4,00,000Correct
- B₹6,00,000
- C₹10,00,000
- D₹2,00,000
Explanation
Current assets = 2.5 × 4,00,000 = ₹10,00,000. Quick assets = 1.5 × 4,00,000 = ₹6,00,000. Inventory = 10,00,000 − 6,00,000 = ₹4,00,000. Check: 4,00,000/4,00,000 = 1.0 = 2.5 − 1.5. ₹6,00,000 is the quick assets figure, not inventory.
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