Question

If Current Ratio is 2.5:1 and Working Capital is ₹60,000, the value of Current Assets is:

• A. ₹40,000
• B. ₹1,00,000
• C. ₹1,50,000
• D. ₹60,000

Hint:

Whenever Current Ratio and Working Capital are given together, assume Current Liabilities as \(x\). Then express Current Assets using the ratio and substitute into the Working Capital formula. \[ \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} \] This method quickly gives the required values.

Answer 1

The Correct Option is B

Concept: Current Ratio is one of the most important liquidity ratios used in financial statement analysis. It measures the ability of a business to meet its short-term obligations with the help of its short-term assets. The formula is: \[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \] Working Capital represents the excess of Current Assets over Current Liabilities. \[ \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} \] In this question, both Current Ratio and Working Capital are given. Therefore, we can first establish a relationship between Current Assets and Current Liabilities and then determine their actual values.

Step 1: Write the Current Ratio in mathematical form.
Given: \[ \text{Current Ratio} = 2.5:1 \] Therefore, \[ \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{2.5}{1} \] Let Current Liabilities be \(x\). Then, \[ \text{Current Assets} = 2.5x \]

Step 2: Use the Working Capital formula.
Working Capital is given as: \[ ₹60,000 \] Using \[ \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} \] we get \[ 60,000 = 2.5x-x \] \[ 60,000 = 1.5x \]

Step 3: Calculate Current Liabilities.
\[ x = \frac{60,000}{1.5} \] \[ x = 40,000 \] Hence, \[ \text{Current Liabilities} = ₹40,000 \]

Step 4: Calculate Current Assets.
Since \[ \text{Current Assets} = 2.5x \] \[ = 2.5 \times 40,000 \] \[ = ₹1,00,000 \]

Step 5: Verify the result.
\[ \text{Working Capital} = 1,00,000-40,000 \] \[ = ₹60,000 \] The answer satisfies the given condition. Therefore, \[ \boxed{\text{Current Assets}=₹1,00,000} \] Hence, the correct option is \[ \boxed{(B)\ ₹1,00,000} \]