Question

A particular firm provided the following data for an accounting year:
Current ratio = $2.5:1$
Liquid ratio = $1.5:1$
Net working capital = $Rs.6,00,000$
Current assets and current liabilities of the firm respectively will be _____________.

• A. $Rs.9,00,000$ and $Rs.3,00,000$
• B. $Rs.10,00,000$ and $Rs.4,00,000$
• C. $Rs.8,50,000$ and $Rs.2,50,000$
• D. $Rs.7,50,000$ and $Rs.1,50,000$

Answer 1

The correct option is B $Rs.10,00,000$ and $Rs.4,00,000$

Working Capital is defined as

Current Assets - Current Liabilities = Net Working Capital

Current Ratio = Current Assets / Current Liabilities

Liquid Ratio = Liquid Assets / Current Liabilities

Current Ratio 2.5 : 1 signifies that for every Re.1 of current liability, firm is having a current assets of Rs.2.5

That means net working capital = Current Assets - Current Liabilities

Rs.600000 = 2.5 - 1

Rs.600000 = 1.5

Hence working capital of Rs.600000 is equal to 1.5

Therefore Current Assets = Rs.600000/1.5 * 2.5

Current Assets = Rs.1000000

Current Liabilities = Rs.600000/1.5 * 1

Current Liabilities = Rs.400000