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CA Final · Financial Reporting · Analysis of Financial Statements

Nirmal Pharma Ltd has current assets of Rs 9,00,000 including inventory Rs 3,00,000 and prepaid expenses Rs 60,000. Current liabilities are Rs 4,00,000 including bank overdraft Rs 1,00,000 that is a continuing part of financing. Analyst A uses the conventional quick ratio (current assets less inventory and prepaid expenses, over all current liabilities). What is the conventional quick ratio?

The conventional quick ratio is 1.35. Quick assets are Rs 9,00,000 less inventory Rs 3,00,000 and prepaid expenses Rs 60,000, giving Rs 5,40,000, divided by total current liabilities of Rs 4,00,000. Prepaids are excluded and the overdraft stays in the denominator.

  1. A1.50
  2. B1.35Correct
  3. C1.00
  4. D1.80

Explanation

Quick assets = 9,00,000 - 3,00,000 - 60,000 = 5,40,000. Dividing by total current liabilities of 4,00,000 gives 1.35. Excluding the overdraft would give 5,40,000/3,00,000 = 1.80, which is not the conventional treatment. Excluding only inventory gives 6,00,000/4,00,000 = 1.50.

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