Question

The ratio of Current Assets (Rs. 3,00,000) to Current Liabilities is 2.4 : 1. The accountant of this firm is interested in maintaining a current ratio of 2 : 1 by acquiring some Current Assets on Credit. You are required to suggest him the amount of current assets which be acquired for his purpose.

Answer 1

Current Ratio = $\frac{\text{Current Assets}}{\text{Current Liabillities}}$

2.4 (Given) = $\frac{\text{Rs. 3,00,000 ~(Given)}}{\text{Current Liabillities}}$

$\therefore$ Current Liabilities $=\frac{Rs.3,00,000}{2.4}=Rs.1,25,000$

In order to reduce the Current Ratio, Current Assets must be acquired on credit. but increase in Current Assets on credit results in an increase in Current Liabilities as well. Let us assume the amount of Current Assets to be acquired as x. After the acquisition of Current Assets of Rs. x on credit,

Current Assets = Rs. 3,00,000 + x

Current Liabilities = Rs. 1,25,000 + x

Current Ratio = $\frac{CurrentAssets}{CurrentLiabilities}$

$Ratiotobemaintained$ = $\frac{Rs.3,00,00+x}{Rs.1,25,000+x}$

Rs. 2,50,000 + 2x = Rs. 3,00,000 + x

$\therefore$ x = Rs. 50,000

Therefore, Current Assets of Rs. 50,000 must be acquired on credit to maintain a Current Ratio of 2 : 1.