If Current Ratio = 2.5, Liquid Ratio = 1.5, Working Capital = Rs. 90,000. What is the value of Inventory?

Correct option is A

We are given:

• Current Ratio = 2.5

• Liquid Ratio (Quick Ratio) = 1.5

• Working Capital = Rs. 90,000

Step 1: Understanding the formulas

• Current Ratio = Current Assets / Current Liabilities

• Liquid Ratio = Liquid Assets / Current Liabilities

• Working Capital = Current Assets - Current Liabilities

From the given data:

Current Assets - Current Liabilities = 90,000

Let Current Liabilities be X. Then,

So, Current Liabilities = Rs. 60,000.

Step 2: Finding Current Assets

Current Assets = 2.5 × 60,000 = 1,50,000

Step 3: Finding Liquid Assets

Since Liquid Ratio = 1.5, we use:

Liquid Assets = 1.5 × Current Liabilities 

Liquid Assets = 1.5 × 60,000 = 90,000

Step 4: Finding Inventory

Inventory = Current Assets - Liquid Assets

Inventory = 1,50,000 - 90,000 = 60,000

Thus, the correct answer is Rs. 60,000.

Information Booster:

1. Inventory (Rs. 60,000) represents the stock of goods a company holds for sale or production.

2. It is included in Current Assets but not in Liquid Assets because it is not readily convertible into cash.

3. A high Current Ratio suggests good short-term financial health, but a very high ratio could mean inefficient asset management.

4. The Liquid Ratio is more stringent as it excludes inventory and focuses on more liquid assets like cash, receivables, etc.

5. If the Inventory is too high, it might indicate poor stock turnover and tied-up capital.

So, Current Liabilities = Rs. 60,000.