Question

Following is the Balance Sheet of Title Machine Limited as on March 31, 2006.
$$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt. (Rs.)}& \text{Assets}& \text{Amt. (Rs.)}\\ \text{Equity Share Capital}& \text{24,000}& \text{Buildings}& \text{45,000}\\ \text{8\% Debentures}& \text{9,000}& \text{Stock}& \text{12,000}\\ \text{Profit and Loss}& \text{6,000}& \text{Debtors}& \text{9,000}\\ \text{Bank Overdraft}& \text{6,000}& \text{Cash in Hand}& \text{2,280}\\ \text{Creditors}& \text{23,400}& \text{Prepaid Expenses}& \text{720}\\ \text{Provision for Taxation}& 600& & \\ & \overline{\underset{–}{69,000}}& & \overline{\underset{–}{69,000}}\end{array}$$

Calculate Current Ratio and Liquid Ratio.

Answer 1

Current Assets
= Stock + Debtors + Cash in Hand + Prepaid Expenses

= Rs. (12,000 + 9,000 + 2,280 + 720)

= Rs. 24,000

Current Liabilities = Bank Overdraft + Creditors + Provision for Taxation

= Rs. (6,000 + 23,400 + 600)

= Rs. 30,000

Current Ratio =$\frac{24,000}{30,000}=\frac{4}{5}=0.8:1$

Liquid Ratio = $\frac{LiquidAssets}{CurrentLiabilities}$

Liquid Assets = Current Assets – (Stock + Prepaid Expenses)

= Rs. 24,000 – Rs. (12,000 + 720)
= Rs. 11,280

Liquid Ratio
$=\frac{11,280}{30,000}=\frac{0.376}{1}=0.376:1$