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

Kaveri Traders has a current ratio of 2.5:1 and current liabilities of Rs 4,00,000. Its inventory is Rs 3,20,000 and there are no prepaid expenses. What is the quick ratio?

The quick ratio is 1.70:1. Current assets are 2.5 times Rs 4,00,000, which is Rs 10,00,000. Deducting inventory of Rs 3,20,000 leaves quick assets of Rs 6,80,000, and dividing by current liabilities of Rs 4,00,000 gives 1.70.

  1. A1.70:1Correct
  2. B2.50:1
  3. C0.80:1
  4. D1.20:1

Explanation

Current assets = 2.5 x 4,00,000 = Rs 10,00,000. Quick assets = 10,00,000 - 3,20,000 = Rs 6,80,000. Quick ratio = 6,80,000 / 4,00,000 = 1.70:1. Option 0.80:1 wrongly divides inventory by current liabilities.

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