2. Chapter 4 Ratio Analysis (LIquidity Ratios) Assignment # 2 with Answers

April 08, 2020

Follow the instructions carefully:

*Classwork to be done on regular basis.
*All given work should be noted legibly in your registers.
*All Assignments to be completed with answers and corrections made wherever mistakes are noticed.

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Task
Do Assignment # 2
Complete list of Current Liabilities and Current Assets (from Chapter 1) is given below for Reference:

Current liabilities
Short term borrowings
*bank overdraft
*loans repayable on demand from banks and other parties
*short term deposits payable on demand

* cash credit

Trade payables*creditors
*bills payable for acceptance to be settled within 12 months

Other current liabilities
*Unpaid /unclaimed dividend
*interest accrued and due/not due on borrowings
*income received in advance (example advance from customers)/ Unearned income
*Calls in advance and interest on calls in advance
*Outstanding expenses
*provident fund payable /ESI payable/ GST payable
*current maturities of long term debts
*application money received for allotment of securities and due for refund and interest due thereon
*unpaid matured deposits and interest thereon
*unpaid matured debentures and interest thereon

Short term provisions
*provision for tax
*provision for doubtful debts

Current assets

Current Investments

*marketable securities

*treasury bills

*debenture redemption investment

* investment in equity instrument, preference shares, government securities, debentures ,mutual funds with the maturity period less than 12 months

Inventory

*stock of raw materials

*work in progress

*stock of finished goods

*stock in trade (i.e.goods required for trading)

* stores and spares

* loose tools

* goods in transit

Trade receivables

*debtors and bills receivables

* provision for doubtful debts (deduction from trade receivables)

Short Term Loans And Advances

* Loans Provided payable on demand

Cash and cash equivalents

*balance with banks; cheques drafts on hand and cash on hand

Other current assets

*prepaid expenses example unexpired insurance ,advance to suppliers

*accrued incomes example interest accrued on investments

*advance tax

*Goodwill ,patents etc. to be written off within 12 months

*interest due on calls in arrears

* interest receivable

*dividend receivable

*unamortized expense to be written off within 12 months

Assignment # 2

Ques. 1.

Calculate the current ratio from the following information:

Total assets                          300000
Non current liabilities           80,000
Shareholders funds              200000
Fixed assets                           160000
Non current investments        100000

Hint:
Total assets = Non current assets + Current assets
Balance sheet equation: Total assets = Equity and Liabilities = Shareholders Funds + Non current liabilities + Current liabilities

Ans. 2 : 1

Ques 2

From the following balance sheet of title machine limited as at 31st march 2020
calculate current ratio and liquid ratio

I. Equity and Liabilities
1. Shareholder's Funds
(a) Share capital                                       2400000
(b) Reserves and surplus                           600000
3. Non current liabilities
(a) Long term borrowings                           90000
3.Current liabilities
(a)Short term borrowings                          600000
(b)Trade payables                                     2340000
(c)Short term provisions                              60000

Total                                                         6900000
II.Assets
1.Non current assets
(a)Fixed assets
(i)tangible assets                                      4500000
2. Current assets
(a)Inventories                                            1200000
(b)Trade receivables                                  900000
(c)Cash and cash equivalents                     228000
(d)Short term loans and advances                72000

Total                                                          6900000

Ans. Current ratio 0.8: 1, Liquid ratio 0.4 : 1

Ques 3.

X limited has a current ratio of 3.5 : 1 and quick ratio of 2 :1. If excess of current assets over quick assets represented by inventory is 24000. Calculate current assets and current liabilities.

Ans. CA 56000, CL 16000

Ques 4

Current liabilities of a company are 560000, current ratio is 2.5:1 and quick ratio is 2:1. Find the value of the inventories.

Ans. 280000

Ques 5

Current assets of a company are 500000. Current ratio is 2.5:1 and liquid ratio is 1:1. Calculate the value of current liabilities, liquid assets and Inventories.

Ans. CL 200000, LA 200000, inventory 300000

Ques 6

X limited has liquid ratio of 1.5:1, inventory 60,000 and current liabilities 120000. calculate current ratio.

Ans. 2:1

Ques 7.

The current assets of a company are 126000 and its current ratio is 1.5 : 1. Excess of current assets over quick assets is 2000. Compute quick ratio, assuming that there are no prepaid expenses, accrued income and advance tax.

Ans. 1.47 : 1

Task .
State the answer to the task given below.

1. The________ is a measure of liquidity which excludes _________, generally the least liquid asset. (choose the correct alternative)

a) current ratio, trade receivable b) liquid ratio trade receivable
c) current ratio, inventory d) liquid ratio, inventory

Task

Answers to Assignment # 2

Ans.1.

Total assets = non current assets + current assets

Current assets = total assets - non current assets (fixed assets +

non current investments

= 300000 - (160000 + 100000)

=300000 - 260000 = 40000

Balance sheet equation: total assets = equity and liabilities = shareholders funds + non current liabilities + current liabilities

therefore, current liability = total assets - shareholders funds -

non current liabilities

= 300000 - 200000 - 80000 = 20000

current ratio = current assets/current liabilities

= 40,000/ 20000 = 2: 1

Ans. 2

(i)current ratio = current assets / current liabilities
current assets = inventory + trade receivables + cash and cash equivalents + short term loans and advances

= 1200000 + 900000 + 228000 + 72000 = 2400000
current Liabilities= short term borrowings + trade payables + short term provisions

= 600000 + 2340000 + 60000 = 3000000
Therefore current ratio = 2400000 /3000000

= 0.8 :1
(ii)liquid ratio = liquid Assets/current liabilities
liquid assets = current assets - closing inventories

= 2400000 - 1200000 = 1200000
Therefore, Liquid Ratio = 1200000/ 3000000

= 0.4 :1

Ans.3

Current ratio = 3.5:1 and quick ratio = 2:1.
suppose current liabilities = X therefore current assets = 3.5 X and
quick assets =2X
inventories = current assets - quick assets
= 24000 = 3.5 X - 2X
= 24000 = 1.5 X
X = 16000
Thus, current liabilities = 16000
current assets = 3.5 X = 3.5 x 16000
= 56000

Ans. 4

current ratio 2.5:1
current assets/ current liabilities =2.5/1
current assets/ 560000= 2.5 /1
current assets= 560000 x 2.5 = 1400000
quick ratio 2:1 quick assets/ current liabilities =2/1
=current asset /560000=2/1
=Quick assets= 560000 x 2= 1120000
Therefore inventories at the end= current assets - quick assets
= 1400000 - 1120000 =280000

Ans 5
current ratio = 2.5: 1
current assets/ current liabilities =2.5/ 1
=500000/ current liabilities= 2.5/1
=current liabilities =200000
liquid ratio =1:1
liquid assets/ current liabilities= 1/1 =liquid assets /200000
=liquid asset 200000
value of inventories at the end= current assets - liquid assets
=500000 - 200000= 300000

Ans 6

liquid ratio =liquid assets /current liabilities
1.5/1 =liquid assets /120000
liquid assets =180000
current assets= liquid asset + inventory
=180000 + 60000 =240000
therefore, current ratio =current assets/ current liabilities
=240000/ 120000= 2:1

Ans 7.
current ratio= current assets/ current liabilities ,
suppose current liabilities= X
1.5/1= 126000/X
=X=126000/1.5 =84000
therefore current liabilities =84000
excess of current assets over quick assets i.e. inventories = 2000
quick assets= current assets – inventory
= 126000 - 2000 =124000
therefore quick ratio =quick assets/ current liabilities
=124000 /84000= 1.47:1