CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis
Kaveri Textiles has a current ratio of 2.5:1 and working capital of Rs 6,00,000. Its inventory is Rs 2,40,000 and there are no other non-liquid current assets. What is its quick ratio?
The quick ratio is 1.9:1. Current liabilities are Rs 4,00,000 and current assets Rs 10,00,000, derived from the 2.5 ratio and working capital of Rs 6,00,000. Deducting inventory of Rs 2,40,000 leaves quick assets of Rs 7,60,000, which divided by current liabilities gives 1.9.
- A1.5:1
- B2.0:1Correct
- C1.9:1
- D1.0:1
Explanation
Current assets minus current liabilities = 6,00,000 and CA = 2.5 CL, so 1.5 CL = 6,00,000, CL = 4,00,000 and CA = 10,00,000. Quick assets = 10,00,000 − 2,40,000 = 7,60,000. Quick ratio = 7,60,000 ÷ 4,00,000 = 1.9:1. The 2.0:1 option is wrong because it wrongly gives liquid assets as 8,00,000, and 1.5:1 mistakenly equals working capital divided by current liabilities.
Did you get it right without looking?
One question tells you little. A timed set on Financial Analysis and Planning - Ratio Analysis shows your real accuracy, how long you take and where you lose marks.
More Financial Analysis and Planning - Ratio Analysis questions
- Which of the following ratios is calculated as (Net Profit after tax + Interest on long-term debt × (1 − t)) ÷ Capital Employed, and is ther…
- Which of the following statements about the proprietary ratio is correct?
- Which ratio is calculated by dividing credit purchases by average trade payables, and shows how many times the firm pays its suppliers durin…
- Which of the following ratios is a measure of a firm's long-term solvency rather than its liquidity or profitability?
- Which of the following ratios is classified as a coverage ratio and shows how many times a firm's operating profit can meet its interest obl…
- Rohan Ltd has an interest coverage ratio of 4 times. Its EBIT is Rs 12,00,000 and the tax rate is 25%. What is its profit after tax (in Rs)?