a) X Ltd. has a current ratio of 3.5:1 and a quick ratio of 2:1. If the excess of current assets over quick assets represented by inventory is ₹24,000, calculate current assets and current liabilities.
b) Capital employed is Rs. 12,00,000, net fixed assets are Rs. 8,00,000, cost of goods sold or cost of revenue from operations is Rs. 40,00,000, and gross profit is 20% on cost. Calculate the working capital turnover ratio.
Answer (1)
(a) To find the current assets and current liabilities, we use the two given ratios:
Current Ratio : This is calculated as Current Liabilities Current Assets = 3.5 : 1 .
Quick Ratio : This is calculated as Current Liabilities Quick Assets = 2 : 1 .
Quick Assets = Current Assets - Inventory
Inventory (Excess of Current Assets over Quick Assets) = ₹24,000
Step-by-step Calculations :
Let C be the Current Assets and L be the Current Liabilities.
From the current ratio: L C = 3.5 ⟹ C = 3.5 L
From the quick ratio: L C − 24 , 000 = 2 ⟹ C − 24 , 000 = 2 L
Solving these two equations:
From C = 3.5 L , substitute into the quick ratio:
3.5 L − 24 , 000 = 2 L
Simplifying: 1.5 L = 24 , 000
L = 1.5 24 , 000 = 16 , 000
Now, substitute back to find C : C = 3.5 × 16 , 000 = 56 , 000
Thus, Current Assets = ₹56,000 and Current Liabilities = ₹16,000 .
(b) To calculate the working capital turnover ratio:
Capital Employed : Given as ₹12,00,000
Net Fixed Assets : Given as ₹8,00,000
Cost of Goods Sold (COGS) : Given as ₹40,00,000
Gross Profit : 20% on cost
Working Capital Calculation :
Working Capital = Current Assets - Current Liabilities = ₹56,000 - ₹16,000 = ₹40,000
Working Capital Turnover Ratio :
The Working Capital Turnover Ratio is calculated as: Working Capital Turnover Ratio = Working Capital Cost of Revenue from Operations (COGS)
Substitute the given values: = 40 , 000 40 , 00 , 000 = 100
Thus, the Working Capital Turnover Ratio is 100 .
