Question

The current working capital ratio is 2:1 and the amount of current liability is Rs 75000. Then what is the amount of current assets ?

• A. 150000
• B. 225000
• C. 37500
• D. 75000

Answer 1

Answer:

A. 150000

Understanding the Current Ratio

• The Current Ratio, also known as the Working Capital Ratio, measures a company's ability to pay short-term obligations or those due within one year.
• The formula is: Current Ratio = Current Assets / Current Liabilities.
• It is a key indicator of liquidity and financial health in accounting.

Calculation Breakdown

• Given Ratio: 2:1 (which means for every Rs 1 of liability, there are Rs 2 of assets).
• Given Liability: Rs 75,000.
• Calculation: 2 = Current Assets / 75,000.
• Result: Current Assets = 2 * 75,000 = 150,000.

Relevant Accounting Concepts

• Current Assets: Cash, accounts receivable, inventory, and other assets expected to be converted into cash within one year.
• Current Liabilities: Obligations due within one year, including accounts payable, short-term debt, and accrued liabilities.
• Ideal Ratio: A ratio of 2:1 is generally considered ideal in many industries, representing a healthy balance between liquidity and efficiency.
• Working Capital: Defined as Current Assets - Current Liabilities. In this specific scenario, the Working Capital would be Rs 75,000 (150,000 - 75,000).