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

Sundaram Traders has current assets of Rs 6,00,000, which include inventory of Rs 2,00,000 and prepaid expenses of Rs 40,000. Current liabilities are Rs 2,40,000, including a bank overdraft of Rs 40,000. Taking the quick ratio as (current assets - inventory - prepaid expenses) / (current liabilities - bank overdraft), what is the quick ratio?

The quick ratio is 1.80. Quick assets are 3,60,000 after removing inventory and prepaid expenses, and quick liabilities are 2,00,000 after removing the overdraft. Dividing 3,60,000 by 2,00,000 gives 1.80.

  1. A1.60Correct
  2. B1.80
  3. C1.50
  4. D1.40

Explanation

Quick assets = 6,00,000 - 2,00,000 - 40,000 = 3,60,000. Quick liabilities = 2,40,000 - 40,000 = 2,00,000. Ratio = 3,60,000 / 2,00,000 = 1.80. Check: if the ratio were 1.60, quick assets would be 3,20,000, which does not match the data. Therefore the correct value is 1.80, and option 1.60 is wrong.

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