Question

(i) A company is having a current ratio of 3 : 1. Its current liabilities are Rs 90,000. The accountant of the firm is interested in maintaining it to its standard ratio by purchasing certain assets on credit. Find out the value of asset to be purchased.

(ii) A company is having its operating ratio equals to 80$\%$. Find out its operating profit ratio.

Answer 1

(i) Current Ratio = $\frac{\text{Current Assets}}{\text{Current Liabilities}}$

= $\frac{\text{Current Assets}}{90,000}=3:1$

Hence, Current Assets = 3 $\times$ Current Liabilities

= 3 $\times$ 90,000 = 2,70,000

Accountant is interested in maintaining the standard ratio i.e., 2:1 by purchasing certain asset on credit.

New Current Assets = $2,70,000+X$

New Current Liabilities = $90,000+X$

Quick Ratio = $\frac{\text{Quick Assets}}{\text{Current Liabilities}}$

= $\frac{2,70,000+X}{90,000+X}=\frac{2}{1}$

$2,70,000+X=2(90,000+X)$

$2,70,000+X=1,80,000+2X$

2,70,000- 1,80,000 = $2X-X$

$X=2,70,000$ - 1,80,000 = Rs 90,000

Therefore, Asset purchased on credit will worth Rs 90,000.

(ii) When operating ratio is $80\%$ then operating profit ratio

= 100 - Operating Ratio

Operating Profit Ratio = 100 - 80 =$20\%$