Question

Calculate Current Ratio and Quick Ratio from the following balance sheet: 

 

Liabilities	Amount (Rs. in Lakhs)	Assets	Amount (Rs. in Lakhs)
Equity share capital	10	Land	5
Reserve	5	Building	8
Preference share capital	5	Plant and Machinery	2
Debentures	5	Fixtures and Fittings	5
Long term loans	5	Cash	1
Bank loans	2	Bank	2
Creditors	3	Debtors	3
Bills Payable	5	Bills Receivable	2
		Stock	10
Total	40	Total	40

 

Hint:

A current ratio above 1 indicates that the company has enough assets to cover its short-term liabilities. The quick ratio excludes inventory for a more stringent test of liquidity.

Answer 1

Step 1: Understanding the Formulas. 
1. **Current Ratio:** 
The current ratio is a measure of a company's ability to pay its short-term liabilities with its short-term assets. It is calculated as: \[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \] 
2. **Quick Ratio:** 
The quick ratio is a more stringent measure of liquidity, as it excludes inventory from current assets. It is calculated as: \[ \text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventories}}{\text{Current Liabilities}} \] 
Step 2: Balance Sheet Information.
The balance sheet information is as follows: \[ \begin{array}{|l|r|r|} \hline \textbf{Liabilities} & \textbf{Amount (in Lakhs)} & \textbf{Assets} & \textbf{Amount (in Lakhs)} \\ \hline \text{Equity Share Capital} & 10 & \text{Land} & 5 \\ \text{Reserve} & 5 & \text{Building} & 8 \\ \text{Preference Share Capital} & 5 & \text{Plant and Machinery} & 5 \\ \text{Debentures} & 5 & \text{Fixtures and Fittings} & 2 \\ \text{Long-term Loans} & 5 & \text{Cash} & 2 \\ \text{Bank Loans} & 2 & \text{Bank} & 2 \\ \text{Creditors} & 4 & \text{Debtors} & 5 \\ \text{Bills Payable} & 4 & \text{Bills Receivable} & 10 \\ \hline \text{Total Liabilities} & 40 & \text{Total Assets} & 40 \\ \hline \end{array} \] 
Step 3: Calculate Current Assets and Current Liabilities.
**Current Assets:** \[ \text{Current Assets} = \text{Land} + \text{Building} + \text{Plant and Machinery} + \text{Fixtures and Fittings} + \text{Cash} + \text{Bank} + \text{Debtors} + \text{Bills Receivable} \] \[ = 5 + 8 + 5 + 2 + 2 + 2 + 5 + 10 = 39 \, \text{Lakhs} \] **Current Liabilities:** \[ \text{Current Liabilities} = \text{Creditors} + \text{Bills Payable} = 4 + 4 = 8 \, \text{Lakhs} \] 
Step 4: Calculate Current Ratio.
\[ \text{Current Ratio} = \frac{39}{8} = 4.875 \] 
Step 5: Calculate Quick Assets.
**Quick Assets:** \[ \text{Quick Assets} = \text{Current Assets} - \text{Inventories} = 39 - (5 + 8 + 5 + 2) = 39 - 20 = 19 \, \text{Lakhs} \] 
Step 6: Calculate Quick Ratio.
\[ \text{Quick Ratio} = \frac{19}{8} = 2.375 \] 
Step 7: Conclusion.
Thus, the calculations for the ratios are: \[ \boxed{\text{Current Ratio} = 4.875, \, \text{Quick Ratio} = 2.375} \] 
Final Answer:
The current ratio is 4.875 and the quick ratio is 2.375.