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CA Final · Financial Reporting · Analysis of Financial Statements

Ganga Foods Ltd has current assets Rs 8,00,000 including inventory Rs 3,00,000 and prepaid expenses Rs 50,000. Current liabilities are Rs 4,00,000, including bank overdraft Rs 1,00,000. Quick ratio, excluding inventory and prepaid expenses from quick assets, and keeping the overdraft in current liabilities, is:

The quick ratio is 1.125. Quick assets are current assets of Rs 8,00,000 less inventory of Rs 3,00,000 and prepaid expenses of Rs 50,000, which is Rs 4,50,000. Divided by current liabilities of Rs 4,00,000 it gives 1.125. Keeping prepaid expenses would give 1.25.

  1. A1.125Correct
  2. B1.25
  3. C2.00
  4. D0.75

Explanation

Quick assets = 8,00,000 - 3,00,000 - 50,000 = 4,50,000. Current liabilities = 4,00,000. Ratio = 4,50,000/4,00,000 = 1.125. Excluding only inventory gives 1.25, which wrongly keeps prepaid expenses.

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