Current ratio is 4:5 and quick ratio is 5:7. If current liabilities are ₹ 3,50,000, the amount of inventory is:

Question

Accepted Answer

The correct option is 2:
The problem requires us to calculate the value of Inventory by utilizing the two liquidity ratios provided: the Current Ratio and the Quick Ratio. The Current Ratio, calculated as Current Assets divided by Current Liabilities (CA/CL), is given as 4:5. With Current Liabilities (CL) at ₹ 3,50,000, we first determine the Current Assets (CA): CA = (4/5) \* ₹ 3,50,000 = ₹ 2,80,000. Next, we use the Quick Ratio, which is Quick Assets divided by Current Liabilities (QA/CL). Quick Assets are defined as Current Assets excluding Inventory and Prepaid Expenses. Given the Quick Ratio is 5:7, the Quick Assets (QA) are calculated as: QA = (5/7) \* ₹ 3,50,000 = ₹ 2,50,000. Finally, the value of Inventory is found by calculating the difference between Current Assets and Quick Assets: Inventory = CA - QA = ₹ 2,80,000 - ₹ 2,50,000, which precisely equals ₹ 30,000.

The incorrect option is 1:
This option suggests an inventory value of ₹ 35,000. The Current Assets were calculated to be ₹ 2,80,000 and the Quick Assets ₹ 2,50,000. For an inventory of ₹ 35,000, the formula would imply Quick Assets of ₹ 2,80,000 - ₹ 35,000 = ₹ 2,45,000. This would result in a Quick Ratio of ₹ 2,45,000 / ₹ 3,50,000, which simplifies to 245/350 or 7:10 (0.7:1). Since the question explicitly provides the quick ratio as 5:7 (approximately 0.714:1), this value is incorrect.

The incorrect option is 3:
An inventory value of ₹ 3,000 is far too low according to the given ratios. If the inventory were ₹ 3,000, the Quick Assets would be very high: ₹ 2,80,000 - ₹ 3,000 = ₹ 2,77,000. This would yield a Quick Ratio of ₹ 2,77,000 / ₹ 3,50,000, which is approximately 0.79:1. This ratio deviates significantly from the required Quick Ratio of 5:7, indicating that a ₹ 3,000 inventory is not consistent with the financial position described.

The incorrect option is 4:
This option gives an inventory value of ₹ 3,50,000, which is exactly equal to the Current Liabilities. If the inventory was ₹ 3,50,000, the Quick Assets would be calculated as Current Assets minus Inventory: ₹ 2,80,000 - ₹ 3,50,000 = -₹ 70,000. Quick Assets, representing realizable short-term assets, cannot be a negative value. Furthermore, an inventory value greater than the total Current Assets (₹ 3,50,000 \> ₹ 2,80,000) is logically and mathematically impossible within the definition of these ratios.