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CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Kaveri Ltd has current ratio 2.5:1 and quick ratio 1.5:1. Its inventory is Rs 3,00,000 and there are no prepaid expenses. What is the amount of current liabilities?

Current liabilities are Rs 3,00,000. The gap between the current ratio of 2.5 and the quick ratio of 1.5 is 1.0 times current liabilities, and that gap equals inventory of Rs 3,00,000. Hence current liabilities equal Rs 3,00,000, giving current assets of Rs 7,50,000.

  1. ARs 4,50,000
  2. BRs 3,00,000Correct
  3. CRs 1,20,000
  4. DRs 7,50,000

Explanation

Current assets - quick assets = inventory. So (2.5 - 1.5) x CL = 3,00,000, giving CL = Rs 3,00,000. Check: CA = 7,50,000, quick assets = 4,50,000, 4,50,000/3,00,000 = 1.5. Rs 1,20,000 results from dividing by 2.5 wrongly.

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