Question

The Current Assets of APE Ltd. are Rs6,00,000; Current Liabilities are Rs2,00,000; Inventories are Rs1,50,000; Prepaid Expenses are Rs50,000 and Cash and Cash Equivalents are Rs1,00,000. What is Quick Ratio?

• A. 1 : 1
• B. 2 : 1
• C. 1.5 : 1
• D. 3 : 1

Hint:

An ideal Quick Ratio is considered to be 1 : 1.
Do not get confused by extra information like Cash and Cash Equivalents in this question; since it is already a component of Current Assets, adding it again would lead to double counting.
Always subtract Inventories and Prepaid Expenses directly from the total Current Assets to find Quick Assets.

Answer 1

The Correct Option is B

Step 1: Understanding the Question:
The question asks for the Quick Ratio (also known as the Acid-Test Ratio or Liquid Ratio) of APE Ltd. based on the given financial data.

Step 2: Key Formula or Approach:
The formulas needed to calculate the Quick Ratio are:
\[ \text{Quick Ratio} = \frac{\text{Quick Assets}}{\text{Current Liabilities}} \]
\[ \text{Quick Assets} = \text{Current Assets} - \text{Inventories} - \text{Prepaid Expenses} \]

Step 3: Detailed Explanation:

• Identify Given Values:
  Current Assets = Rs 6,00,000
  Current Liabilities = Rs 2,00,000
  Inventories = Rs 1,50,000
  Prepaid Expenses = Rs 50,000
  Cash and Cash Equivalents = Rs 1,00,000 (Note: This is already a part of Current Assets and is a liquid asset. We do not need to add it separately).
  
• Calculate Quick Assets:
  Quick assets represent those current assets that can be converted into cash almost immediately.
  Inventories are excluded because they take time to sell.
  Prepaid expenses are excluded because they cannot be converted into cash at all.
  Using the formula:
  \[ \text{Quick Assets} = 6,00,000 - 1,50,000 - 50,000 \]
  \[ \text{Quick Assets} = 6,00,000 - 2,00,000 = Rs 4,00,000 \]
  
• Calculate Quick Ratio:
  Using the ratio formula:
  \[ \text{Quick Ratio} = \frac{4,00,000}{2,00,000} = 2 \]
  Thus, the ratio is 2 : 1.
  

Step 4: Final Answer:
The Quick Ratio of APE Ltd. is 2 : 1, which corresponds to Option (B).